Dissent surfaces again in the FOMC meeting
Market participants closely watch the Fed’s actions and the Fed officials’ and policymakers’ views. The monetary policy decisions at Federal Open Market Committee (or FOMC) meetings impact fixed income (TLT) and stock (SPY) markets. Fixed income markets include Treasuries (IEF), high-yield (HYG) (JNK) and investment-grade debt, and mortgage-backed securities. They’re particularly sensitive because of monetary policy implications on interest rates.
Fisher and Plosser voice their disagreement
Fed official disagreements are fairly rare. As a result, financial markets are interested in the disagreements. Dallas Fed Chief, Richard Fisher, and the head of the Philadelphia Fed, Dr. Charles Plosser, disagreed with the policy guidance issued at the end of the FOMC. They have been known to have hawkish leanings. They don’t agree with the extended monetary stimulus. A central bank “hawk” usually puts a higher priority on the Fed’s inflation goal instead of the full employment goal. You can read about the differences in the approach between “doves” and “hawks” here.
Richard Fisher’s view on the FOMC’s guidance
Richard Fisher believes that the Fed needs to tighten policy. This is based on the improved labor market and inflation outlook. He also believes that continued monetary accommodation is causing signs of ““ in certain asset classes. He spoke earlier about signs of froth in high-yield bond (JNK) (HYG) markets. He also spoke about irrational exuberance in stock markets.
In a speech at the University of Southern California in July, Richard Fisher announced that he’d be arguing for a change in the Fed’s monetary policy stance. He said that labor-market conditions were “improving smartly, quicker than the principals of the FOMC expected.” Inflation is also getting closer to the Fed’s 2% goal earlier-than-expected. He compared monetary policy decisions to duck hunting. Mr. Fisher explained that the hunter must take the duck’s flight path into account before shooting. Similarly, the Fed must track the U.S. economy’s future path as a base for making policy decisions. You can read about the key investor takeaways from his speech here.
Why Charles Plosser continued to disagree
Charles Plosser felt that the language of the FOMC’s guidance was time-dependent. The FOMC statement said that the federal funds rate would be maintained at the current target levels for a “considerable time” after monthly bond purchases end. It didn’t include any provisions that mentioned the FOMC’s progress towards its inflation and employment goals. Dr. Plosser also voted against the July FOMC motion, on the same grounds. You can read about the July FOMC here.
Dr. Plosser is a keen advocate of rules-based guidance. Changes in the federal funds rate would be based on changes in economic variables—like gross domestic product (or GDP) growth rates. You can read his take on rules-based guidance here.
To read about other recent speeches by Fed officials and their impact on exchange-traded funds (or ETFs), please visit Market Realist’s Fixed Income page.