From top left to right, clockwise: Dallas Fed President Richard Fisher, Kansas City Fed President Esther George, Richmond Fed President Jeff Lacker, former Kansas City Fed President Thomas Hoenig and Philadelphia Fed President Charles Plosser.
Before Richard Fisher became a bur inside the boot of the Federal Reserve, before he opposed the leader of the world’s most powerful financial institution — before he even joined the central bank — he received a word of advice that would define his tenure over the next decade.
It was late 2004, a few months before Fisher took over as president of the Fed district based in Dallas. Fisher was at a Christmas party at news anchor Sam Donaldson’s home in Northern Virginia when he bumped into Alan Greenspan, then chairman of the central bank. Greenspan invited Fisher tothe Fed’s marbled headquarters on Constitution Avenue the next day. Fisher assumed it was his initiation into the exclusive and often opaque tribe of central banking.
“Richard, there’s only one thing you need to know about this business,” Fisher, in an interview early this month, recalled Greenspan telling him. “I thought, ‘Aha! I’m inside the temple. I’m going to learn a deep dark secret.’
“And you know what he told me? ‘Always speak to the truth. That’s all I ask of you.’ ”
Fisher took the directive to heart. Since joining the Fed 10 years ago, he has dissented eight times from central bank policy — and his track record is not even the most flagrant. Former Kansas City Fed President Thomas Hoenig dissented at every central bank meeting in 2010. Richmond Fed President Jeffrey Lacker repeated the feat two years later. Other reliable contrarians include Hoenig’s successor, Esther George, and the head of the Philadelphia Fed, Charles Plosser.
Consider the temple breached. In the wake of the worst financial crisis since the Great Depression, the number of dissents has not only reached the highest level in nearly 20 years, but the volume of the opposition has also been turned up. A little over a decade ago, the Fed did not immediately disclose the breakdown of its votes. Now, the critics are among the loudest voices. George, the resident dissenter last year, delivered 11 speeches, more than twice as many as then-Chairman Ben S. Bernanke did. Fisher gave 28 speeches.
The past six years have not only reshaped assumptions about the American economy; they have also transformed the institution responsible for steering the ship. The naysayers have helped crack the facade of an omnipotent central bank pulling the strings of the economy. There is no wizard behind the curtain, but there are plenty of opinions — and no guarantee of getting it right.
“When all men think alike, no one thinks very much,” Plosser said in an interview last month, quoting writer Walter Lippman. “Life is not full of consensus and unanimity, particularly in these highly uncertain times.”
Exposition
Division is actually part of the Federal Reserve’s DNA.
The central bank was established a century ago with a decentralized structure: a board of governors based in Washington and 12 regional bank presidents across the country.
Today, that means the perspective of farmers in the Midwest, traders on Wall Street and tech entrepreneurs in Silicon Valley are all represented when Fed officials gather in the nation’s capital every six weeks to discuss the direction of the economy.
But for most of the Fed’s history, the discussion around the mahogany table was carefully concealed from the public. The central bank released no timely record of its decisions, much less the internal debate surrounding them. Monetary policy is by nature an arcane and abstract subject, and the dearth of information only added to the Fed’s impregnable aura.
But dissent was actually quite common at the central bank. An analysis by the St. Louis Fed of central bank meetings dating to 1957 shows about 6 percent of votes cast have been dissents, though the actual number varied widely by year. The record occurred in 1963 with 28 opposing votes. As the nation grappled with runaway inflation in 1980, 25 dissents were registered.
But dissent diminished as the country entered the long economic expansion that began in the early 1990s. That was partly the result of the Great Moderation — there is little to argue about when the economy is strong and bumps in the road are small and spaced out — and partly the result of Greenspan’s oligarchical leadership style. At meetings, he always spoke first, leaving officials to disagree at their own peril.
Members of the board of governors, once a raucous group, began voting in line with the chairman, a tradition that continues today. Opposition — when there was any — was left to the regional bank presidents.
The Fed started pulling back the curtain on its operations during this period of preternatural calm. Under Greenspan, the central bank began acknowledging its target for short-term interest rates, issuing policy statements and announcing the breakdown of its votes. During his 20 years in office, Greenspan averaged 0.54 dissents per meeting, according to the St. Louis Fed’s research, about half the rate of his predecessor, Paul Volcker.
In two years, 2000 and 2004, there were no dissents.
“I am not convinced that the decline in macroeconomic volatility of the past two decades was primarily the result of good luck,” then-Fed Gov. Ben S. Bernanke said in a speech in 2004. “My view is that improvements in monetary policy, though certainly not the only factor, have probably been an important source of the Great Moderation.”
Modern Fed
Ten years later, dissent is back in vogue.
Less than 48 hours after central bank officials wrapped up their meeting in Washington on Wednesday, Richmond Fed President Jeffrey Lacker registered an objection.
“I cannot support the committee’s planned approach to moving the Fed’s balance sheet toward its normal state,” he wrote. “It is unnecessary to the conduct of monetary policy, the central bank’s primary responsibility, and involves distributional choices that should be made through the democratic process and carried out by fiscal authorities, not by an independent central bank.”
Lacker has spent the years since the crisis warning that the Fed is overstepping its authority. The central bank has been propping up the housing sector by buying massive quantities of mortgage-backed securities. To Lacker, it is essentially distorting financial markets, helping to determine winners and losers.
He is the lone registered opponent of the Fed’s plan to hold onto those securities indefinitely. It is a position he should be used to by now: Lacker is tied for third place as the most contrarian Fed president in history.
“I think matters of very important principles are at stake,” he said an in interview last month. “We’re in uncharted territory with regard to . . . what central banks can and ought to do.”
Dissent is perhaps the inevitable consequence of the most tumultuous period in America’s economic history since the Great Depression. The Fed unleashed a battery of new tools to combat the financial crisis: rescuing flailing banks, slashing its target interest rate to zero and pumping unprecedented sums of money into the economy — and that was just the beginning.
Now, the central bank is trying to figure out how to scale back its support without rattling the recovery, spawning a whole new set of debates. Between 2006 and 2013, spanning the crux of the crisis, the rate of dissent jumped to an average of 0.74 per meeting, according to the St. Louis Fed. So far this year, there have been four dissents, for an average of 0.67 per meeting.
Two occurred after the Fed’s meeting Wednesday. Plosser and Fisher dissented over concerns that the official policy statement did not capture the progress of the recovery or leave the Fed enough flexibility to move quickly to raise interest rates.
“At the end of the day, it may not make a whole lot of difference,” Plosser said in an interview before the meeting. “But the point is to move the conversation in a way that raises the chance that we’re going to do it next time, or the time after that.”
Dissent at the Fed is a civil affair. Arguments are made with scatterplots and PowerPoints rather than the pointed rhetoric and attack ads that typically accompany politics in Washington. One of Bernanke’s innovations as chairman of the Fed was astoundingly simple: putting himself last on the meeting agenda to give others a chance to air their opinions first.
Janet L. Yellen has continued that tradition, and Fisher said his perspective receives an “extremely open and fair hearing.” On Wednesday, Yellen suggested she welcomes the debate.
“I think it’s very natural that the committee should have a range of opinion about a decision as crucial as what is the right time to begin to normalize policy,” Yellen said. “I don’t consider two dissents to be an abnormally large number.”
“When you have a lot of people with different views on the committee, you can’t muzzle them,” said Larry Meyer, head of Macroeconomic Advisers and a former Fed governor. “The price of diversity is dissent.”
The role of dissent
There is one big problem with going against the grain: You run the risk of being spectacularly and singularly wrong.
Take August 2008, when Fisher cast the lone dissenting vote because he wanted the central bank to increase interest rates. Less than two months later, investment bank Lehman Bros. had collapsed, the government was bailing out insurance giant AIG and the economy was in freefall.
“I wish I had the hindsight that I have now,” Fisher said. “Do I feel embarrassed by that dissent? Not one bit. . . . You have to have pretty thick skin in this business.”
Only a handful of dissents since the financial crisis have been in favor of the Fed acting more aggressively. Most of the time, they arise out of concern that the central bank has gone too far, too fast.
But being in the majority doesn’t always mean being right; it just means there’s more cover when you’re not. Fed consensus during the 1960s kept interest rates low despite growing inflationary pressures. It wasn’t until the 1980s that the central bank was able to put a lid back on prices.
“The pack was dead wrong,” Plosser said
Hoenig, the former Kansas City Fed president who ranks among the top five all-time dissenters, said the votes he second-guesses are those in which he held his tongue.
In the early 2000s, he said he believed the Fed should raise interest rates to help dampen what is now acknowledged to have been an overheating economy. But he compromised and voted with the majority to leave rates unchanged.
After the financial crisis, he changed his strategy. He dissented at every meeting in 2010 to protest the Fed’s stimulus campaign.
Hoenig was concerned that the program could distort financial markets and sow the seeds for inflation. So far, neither has come to pass. If anything, inflation has remained stubbornly below the Fed’s targets. And most economists agree that the problem with the Fed’s stimulus efforts in 2010 was that they ended too soon. The recovery failed to reach escape velocity, and the Fed launched yet another round of bond purchases whose trillion-dollar price tag has dwarfed all previous efforts.
None of that phases Hoenig, now the outspoken vice chairman of the Federal Deposit Insurance Corp. He and other dissenters say they are fulfilling a broader purpose, one that lies at the heart of every public institution but from which the Fed for so long shied away: transparency.
“I recognize that when the debate is done, the majority carries the day and you respect that. But that doesn’t mean that you keep quiet. If you believe in transparency in the real sense, then the debate should not be confined,” Hoenig said. “I think to do other than that is to insult the public, frankly.”
The reality is that a rogue voter has little chance of changing the course of policy. In recent years, the board of governors and the head of the New York Fed have cast their vote alongside the Fed chairman. Only four other regional Fed presidents get to vote, and their numbers automatically put them in the minority.
Of course, Hoenig and other dissenters say history will be the ultimate arbiter of the wisdom of their warnings.
It took years before the consequences of low rates and lax regulation during the 2000s materialized. Plosser spent two decades arguing that the Fed should set an explicit target for inflation. The central bank finally adopted one in 2012, partly through his urging.
“You have to be careful about drawing quick judgments of who’s right and who’s wrong,” Fisher said. “Monetary policy operates with a long lag. This is a drama, a play, which is only in its second or third act.”