Thursday, March 23, 2023
HomeMarketTo Beat Inflation, the Fed Needs Dissent

To Beat Inflation, the Fed Needs Dissent

The seal of the US Federal Reserve Board of Governors at the William McChesney Martin Jr. Federal Reserve building in Washington, DC.

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Samuel Corum/Bloomberg

About the author: Avraham Shama is the former dean of the College of Business at the University of Texas, the Pan-American. He is professor emeritus at the Anderson School of Management of the University of New Mexico and author of Cyberwars: David Knight Goes to Moscow, published by 3rd Coast Books.

For the past 18 years the seven U.S. Federal Reserve Board governors who make up the stable core of the rate-setting committee have voted in lockstep. During that period, spanning approximately a collective 144 decisions and 1,008 individual votes, not one governor dissented, according to records published by the St. Louis Fed. Such decisions could have been made by one member, saving the taxpayer time and money. No doubt the ongoing Federal Open Market Committee rate-setting this week will be reached by consensus too.

That means the Federal Reserve Board’s decision making process is flawed. Divergent opinions would better serve the U.S. and global economies. While the present Fed decision-making style may have been appropriate 20 or 30 years ago, recent developments suggest that it can be enhanced. 

The FOMC Is the body that sets the Fed’s rates. It consists of the governors, who are appointed for 14 years, along with the president of the Federal Reserve Bank of New York and four annually-rotating members of regional federal bank presidents. Congress established the FOMC in 1913 as part of the Federal Reserve System to set interest rates to assure low inflation and high employment. Its members meet eight times a year to set the discount rate. And while the other voting members do occasionally dissent, more often than not decisions are made by consensus.

Economist and former St. Louis Fed official Daniel Thornton has argued that such consensus is the result of past experience and training, mostly in economics. While it is true that FOMC members use a unique set of concepts and language, it does not necessarily follow that they should always make the same decision. A group of seven surgeons looking at the same set of facts and images rarely recommends the same course of action. Even the decision to take out Osama bin Laden was not without detractors.

This Fed decision-by-consensus culture may have contributed to sudden pivots and gyrations in setting interest rates in recent years. For example: In 2019, the Fed began to tighten the federal funds rate prematurely, recognized its mistake and reversed course. In spring 2020, facing a pandemic-induced economic collapse, the Fed pumped trillions of dollars into the economy for far too long, held the fed funds rate close to zero, and propelled high inflation. Since 2022, the Fed waited too long to tighten and has been overtightening by moving rates higher and faster.

These are serious shortcomings for an otherwise sensible organization. But there’s much the Fed can do to make better policy.

First, it should acknowledge that its present FOMC decision-making process can be improved. FOMC members set rates eight times a year after a two-day meetings behind closed doors, where they review and deliberate on voluminous data provided by the Fed’s regional banks and by the Federal Reserve Bank. It is an amicable process designed to reach unanimity. But it may lack rigor and depth that could facilitate better understanding and point to different rate-setting actions.  

Second, the Fed should use Beige Book data more constructively. During FOMC meetings, the twelve members look at a lot of raw data to decide what they mean. But such ample, amorphous information can hide underlying themes. Different data analyses—including statistical—to identify trends and their strengths could benefit FOMC rate-setting decisions.

Third, FOMC members should provide their rate-setting recommendations prior to their group discussions. The present format of making rate decisions in conference room meetings over two days with all voting members present is unsound. It enables strong personalities to influence others, promote jawboning. It exerts pressure on members who are yet to vote to join others’ decisions. A more objective format would collect member rate recommendations independently before the meeting. 

Finally, the FOMC should appoint a randomly selected member in every meeting as the devil’s advocate. This presupposes the existence and merit of non-unanimous points of view and could moderate consensus viewpoints. Having every FOMC member play this role once every twelve meetings could help all members develop skills to interpret the same set of data differently. Imagine, if you will, Fed Chair Jerome Powell making the case for lowering the discount rate in the upcoming FOMC meeting. Going through the exercise would strengthen his thinking. 

For too long the Fed has been setting rates using old methodology. It’s time to modernize the Fed’s decision making process.

Guest commentaries like this one are written by authors outside the Barron’s and MarketWatch newsroom. They reflect the perspective and opinions of the authors. Submit commentary proposals and other feedback to


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