|
 Yellen's inclusive style has been tested recently by two fellow
governors who publicly appeared to disagree with her view, shared by
Vice Chair Stanley Fischer, that the Fed will probably need to raise
interest rates this year.
Governors are permanent members of the Fed's policy-making panel who
typically vote with the chair, and it is unusual for them to
publicly contradict the Fed chief. Yet both Lael Brainard and Daniel
Tarullo, speaking shortly after Yellen and Fischer, listed an array
of risks to economic growth that suggested rate hikes should wait.
Most other Fed voters, with the notable exception of the dovish
president of the Chicago Fed, have suggested that they, like Yellen,
support a 2015 rate rise. The arithmetic suggests Yellen could face
as many as three dissents from her 10-member panel if she decides to
raise rates at the Fed's December meeting.
It may not come to that since regardless of the debate about the
timing of the rate lift-off nearly all Fed policymakers do agree on
a broad scenario of gradual rate increases once they start. Fed
tradition may also count: though regional presidents sometimes
dissent, no governor has done so since 2005.
 What is perhaps more troubling for Yellen than the specter of
dissents is that many investors do not believe the Fed will raise
rates at all this year. Unless Yellen manages to shift those
expectations well ahead of time, possibly starting with the Oct.
27-28 meeting, a rate hike could roil markets.
"It’s urgent for the committee to communicate more clearly about
their policy strategy," Yellen's former advisor Andrew Levin said,
adding that the onus for doing so is on the Chair.
A Fed spokeswoman declined to comment for this story.
Yellen's style contrasts with that of some of her predecessors,
notably Alan Greenspan, who used to dictate the outcome of meetings
as, or even before, they began.
Yellen spends the better part of the days leading up to each
policy-setting meeting talking in person or by phone with each of
her 16 fellow policymakers, her schedules show. Not even Ben
Bernanke, a former academic who like Yellen valued consensus,
appears to have conferred as much on so regular a basis.
That consensual style has paid dividends, enabling Yellen to keep
hawkish members of the committee on side.
Richmond Fed President Jeffrey Lacker heeded Yellen's call to wait
with rate hikes for more clarity that inflation was firming,
breaking ranks with her only just last month.
It also may have helped in September when San Francisco Fed
President John Williams, a centrist, saw strong arguments on both
sides, but ultimately agreed to "go along" with Yellen's majority,
as he told reporters afterwards.
COMMUNICATING WITH MARKETS
Fed officials have pledged that any rate rise would not come as a
surprise to markets. Yet now Yellen and investors appear at odds,
with markets now betting that the first hike in a decade will come
in March 2016 at the earliest.
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Markets virtually rule out a move this month, and see a 39 percent
chance of a December hike based on fed funds futures trading. This
week's meeting needs to improve those odds to keep December on the
cards.
To convince markets a rate hike is coming, the statement needs to
suggest that only a deterioration in the economy could forestall it,
said Levin.
Another option would be for the Fed to flag a rate rise by
softening, or removing, its warning about the risks from a global
slowdown that stopped it from raising rates last month.
Yellen could be still persuaded by weak economic data and her dovish
colleagues that the economy needs more time to withstand a rate
rise. A change of heart would also need some clear explanation, and
could draw criticism anyway.
"She could be facing a fork in the road where there are several
dissents no matter which way they go," Levin said.
While the U.S. unemployment rate is near normal at just above 5
percent, inflation is unusually low and the Fed is alone in
contemplating policy tightening while its peers in Europe, Japan and
China remain in an easing mode. Such a constellation makes finding
consensus on policy harder than usual.
“People don’t know where their (the Fed's) next step is,” Stanford
University professor John Taylor told Reuters. “There can be a lack
of consensus about the rationale for the choice, but the choice has
to be made.”
Former Vice Chair Don Kohn, though, believes that Yellen can remain
true to her collaborative style, and reflect, rather than simply
direct, the view of the majority.
“She has worked hard to build a committee consensus,” Kohn said.
“This is a very difficult decision that isn’t clear cut one way or
another. It’s up to the chair to find and guide the center of
gravity.”
(Reporting by Ann Saphir; Editing by David Chance and Tomasz
Janowski)
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