Fed Watchers Hope For Dovish Tilt In 2023 As New FOMC Voters Influence Policy

  • Market Overview
  • Editor's Pick
  • Regional bank heads rotate into FOMC voting positions next year
  • Hawk-dove rankings in flux in volatile economic environment
  • Inflation remains strong, but growth and employment still solid

There’s always a certain amount of speculation towards the end of the year about the rotation of the Fed regional bank presidents who get to vote on the Federal Open Market Committee (FOMC), but it seems more significant this year as the monetary policy panel is in the midst of a rate-hiking spree.

It may be a sign of desperation that Fed watchers are seeing a more dovish tilt among the 2023 FOMC voters. All 12 regional bank presidents take part in the debate, but the voting members have more leverage because a dissent can send a message.

Among the current FOMC voters, James Bullard of St. Louis, Esther George of Kansas City, and Loretta Mester of Cleveland have generally lined up on the hawkish side—those favoring higher interest rates to stop inflation . Susan Collins, a voter this year, is new to Boston and ranked as somewhat dovish.

But it’s getting harder to tell. Bullard wanted a bigger hike in March but George thought a smaller hike in June would be less of an abrupt change. Some expect George to dissent again this week for the same reason.

Among those rotating into voting positions next year, Neel Kashkari at Minneapolis and Charles Evans at Chicago have traditionally ranked as doves, though inflation has made them less so. Patrick Harker of Philadelphia tilts hawkish and newcomer Lorie Logan at Dallas, a former executive vice president at the New York Fed, is fairly neutral.

But there are also three new members on the board of governors, who have a permanent vote on the FOMC. These three tend to be dovish and could tilt the panel further in that direction. Lisa Cook and Philip Jefferson took office in May and Michael Barr, vice chairman for supervision, came on board in July.

Traditionally, a consensus-minded Fed will follow the lead of the chairman and the 12 voters have mostly gone along with the recent rate hikes. Still, a Bloomberg survey of economists published in September found a majority expected a more dovish FOMC in 2023. Only a third said it won’t make a difference.

Fed Chairman Jerome Powell has made a show of his commitment to taming inflation, but the former lawyer and partner at the Carlyle Group private equity fund has been anything but surefooted in navigating a volatile environment. He has shown himself to be impressionable and reliant on staff economists at the Fed’s Washington headquarters.

The FOMC is expected to raise its policy rate by three-quarters of a percentage point at this week’s meeting for the fourth time in a row, moving from the current target of 3.0%-3.25% to 3.75%-4.0%. The question is whether it will keep up that pace in its last 2022 meeting in mid-December or start slowing down.

Core inflation—minus food and energy prices—continued strong in September, according to the personal consumption expenditure index on Friday. Prices in the inflation measure used primarily by the Fed rose 0.5% on the month and 5.1% on the year —still far above the Fed’s putative 2% target.

It was bad news for the administration heading into the mid-term election on Nov. 8, but hiring and economic growth have continued relatively strong. The Commerce Department reported on Thursday that GDP in the third quarter showed a 2.6% annual rate of growth, though analysts were quick to point out that volatile trade data skewed the results. Third-quarter growth followed two quarters of contraction and the fourth quarter could also show negative growth.

The jobs report for September showed 263,000 new jobs and a drop in the unemployment rate to 3.5%. The consensus forecast for the October report due out Friday is for 200,000 new jobs and a headline unemployment rate of 3.6%.

Data components are beginning to show the economy slowing. A consensus is forming that the Fed will raise its policy rate by 0.5 percentage points in December and then 0.25 percentage points at each of the first two meetings in 2023. That forecast could change, however, if inflation proves to be stubborn—or if the doves gain the upper hand.

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