The Federal Reserve committee that sets interest rates will likely act more aggressively in 2022 to contain rising inflation, as some of the most vocal proponents of tighter monetary policy rotate into voting positions.
The pending ascension of Lael Brainard to vice chair of the Fed and the White House's expected nominations of more progressive nominees to fill three open spots on the Fed's seven-seat Board of Governors may counter this shift. But economic realities often upend expectations.
"I think the current challenges with inflation will counteract what we think of as traditional hawkish versus dovish views on the [Federal Open Market Committee]," said Ian Katz, managing director of Capital Alpha Partners. "In other words, officials you might think of as generally being dovish are going to be concerned about inflation and will probably feel compelled to act on the data they see rather than feel like they need to stimulate the economy."
Fed hawks tend to advocate for tighter monetary policy, largely through interest rate hikes, while doves generally favor looser policy, with low rates intended to boost employment and economic growth.
Rotating votes
Through the Fed's annual rotation of voting members, the presidents of the Federal Reserve banks of Kansas City, St. Louis, Cleveland and Boston will become four of the 12 voting members of the FOMC. The seven-member Board of Governors and the president of the Federal Reserve Bank of New York comprise the remaining voting members.
Patrick Harker, the president of the Federal Reserve Bank of Philadelphia, will serve as an interim voting member until the new president of the Federal Reserve Bank of Boston is named. Previous Boston Federal Reserve President Eric Rosengren announced his retirement in September.
Giving up their votes this year are the heads of the Atlanta, Chicago, San Francisco and Richmond, Va., banks.
Among the new voting members, St. Louis Fed President James Bullard, Kansas City Fed President Esther George and Harker are among the most hawkish members of the FOMC, according to an analysis of speeches and previous votes by InTouch Capital Markets.
Chicago Fed President Charles Evans and San Francisco Fed President Mary Daly are among the most dovish members, according to the analysis.
President Joe Biden will attempt to fill three vacancies on the Fed Board of Governors with more dovish candidates, said James Knightley, chief international economist with ING.
"They might put a greater emphasis on the need for a broader range of people feeling the benefits of economic growth — and in consequence put more emphasis on the employment aspect of the Fed's mandate, thereby being more willing to tolerate higher inflation in the near-term to achieve that aim," Knightley said. "As such, the spectrum of the views within the Fed may stay relatively unchanged versus last year."
The central bank plans to end its $120 billion monthly bond-buying program in March, with as many as four rate hikes possible before the end of 2022.
Still, if COVID-19 cases continue to surge and Democrats successfully pass another round of federal stimulus, the Fed's move to tighten policy may be put on hold, said Steve Pavlick, head of policy at Renaissance Macro Research.
"I think investors are counting on the Fed to be more hawkish [in 2022], but I think they will be more dovish than people think," Pavlick said.
Inflation and rate hikes
Still, inflation will likely force the Fed's policy direction this year. The consumer price index and the personal consumption expenditures price index, both measures of inflation, saw annual increases of 6.9% and 5.7%, respectively, in November 2021, the biggest jumps in about four decades.
"Even the doves … are arguing for higher interest rates this year, so I don't think the committee membership changes alters the narrative on rate hikes very much — particularly for this year," said Knightley.
At the FOMC's December 2021 meeting, participants discussed the shift in policy in response to inflation, according to the Fed's minutes, released Jan. 5.
"Some participants judged that a less accommodative future stance of policy would likely be warranted and that the Committee should convey a strong commitment to address elevated inflation pressures," the minutes state. "These participants noted, however, that a measured approach to tightening policy would help enable the Committee to assess incoming data and be in position to react to the full range of plausible economic outcomes."
How aggressive the Fed may be will likely depend far more on what those economic outcomes turn out to be, rather than the policy views of the new FOMC voters.