All articles 199

11 18 2015 | by Victor Xing | Central Banks

How does Bank of England’s MPC differ from FED’s FOMC?

There exists significant differences between Federal Reserve’s Federal Open Market Committee (FOMC) vs. central banks following a system similar to Bank of England’s Monetary Policy Committee (MPC)

Bank of England

First, policy decisions by Bank of England MPC are by majority rule of its voters with Governor’s vote as a tie-breaker (please see source 1 below).  There are currently five internal members (Governor, three Deputy Governors, and Chief Economist) and four external members (they are appointed directly by the Chancellor) to reflect independent views outside Bank of England.

The Monetary Policy Committee – decision by majority vote with Governor Carney (front, 2nd from the right) as a the tie-breaker

Bank of England MPC
Bank of England Monetary Policy Committee

Source 1: United Kingdom Bank of England.  Please note the article is somewhat out of date – the BOE has moved to release MPC Minutes on the same day of policy decisions and inflation reports.

The Federal Reserve

The Federal Reserve is an unique central bank.  It is true that there are voters, but not all votes are the same.  The five members Board of Governors are permanent voters, and this will again become a seven member group once the Senate confirms Kathryn Dominguezand Allan Landon to fill the remaining two vacancies (the Board may possibly become an eight member group: As Two Fed Nominees Await Confirmation, Panel Chief Points to Another Vacancy).

President of the Federal Reserve Bank of New York is also a permanent voter (and Vice Chair of the FOMC), a position that reflects the bank’s strategic role in conducting open market operations via its Markets Group.

The remaining four voters are rotated amongst other Federal Reserve Bank Presidents.

Most importantly, the votes are there to express whether voters agree or disagree with the decision by the Committee, whatever it may be.  It is more of an expression of “approve” or “disapprove” after the fact.  Since these are not votes for or against a predefined policy, such as BOE’s votes on interest rates, there is no need for the FOMC to have a tie-breaker.  Also, five dissents at the FOMC would only signal serious erosion of the FED Chair’s credibility (unable to bring policymakers toward a common consensus)

Finally, President of the New York Fed and Governors of the Federal Reserve Board are considered part of the Chair’s “inner circle” – and the FED Chair will likely push for a policy path agreeable to these policymakers.  In the FED’s “dot plot” of year-end funds rate target level, the “clump” usually represents the FED Chair’s “dot,” together with the Governors’

FOMC "dot plot" vs. Bank of England MPC decisions
The Federal Reserve Open Market Committee (FOMC)’s “dot plot”

In conclusion, voting at the FOMC is a final expression after process of deliberation and consensus building by the FED Chair.  5:5 vote is a sign that the FED Chair and a small group of policymakers forcefully pushed an unpopular policy forward, but there is little the dissenters can do about that.

More context regarding FOMC dissenters

Language in the December FOMC Statement regarding the three dissenters (they voted against the policy action specified in the FOMC Statement):

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; and Daniel K. Tarullo.

Voting against the action were Richard W. Fisher, who believed that, while the Committee should be patient in beginning to normalize monetary policy, improvement in the U.S. economic performance since October has moved forward, further than the majority of the Committee envisions, the date when it will likely be appropriate to increase the federal funds rate; Narayana Kocherlakota, who believed that the Committee’s decision, in the context of ongoing low inflation and falling market-based measures of longer-term inflation expectations, created undue downside risk to the credibility of the 2 percent inflation target; and Charles I. Plosser, who believed that the statement should not stress the importance of the passage of time as a key element of its forward guidance and, given the improvement in economic conditions, should not emphasize the consistency of the current forward guidance with previous statements.

FED Chair Yellen responded to questions regarding three dissents at the December 2014 FOMC:

[Peter Cook, Bloomberg Television] And if I could follow up just separately on the dissents at this meeting. There were three dissents, a notable number, certainly. What does that suggest about the debate around the table and your ability to forge consensus going forward? Are you disappointed with the number of dissents?

CHAIR YELLEN. So let me start with the number of dissents. There is a wide range of opinion in the Committee. I think it’s appropriate for people to be able to express their views. And, in a sense, you see dissents on both sides. I think the statement does a good job of reflecting what the majority of the Committee thinks is appropriate policy. So at—you know, at a time like this, where we are making consequential decisions, I think it’s very reasonable to see divergences of opinion.

Next article11 17 2015 | by Victor Xing | Economics

October Consumer Price Index and FED Policy Implications