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Forecast dispersion, dissenting votes, and monetary policy preferences of FOMC members: the role of individual career characteristics and political aspects

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Abstract

Using data from 1992 to 2001, we study the impact of members’ economic forecasts on the probability of casting dissenting votes in the Federal Open Market Committee (FOMC). Employing standard ordered probit techniques, we find that higher individual inflation and real GDP growth forecasts (relative to the committee’s median) significantly increase the probability of dissenting in favor of tighter monetary policy, whereas higher individual unemployment rate forecasts significantly decrease it. Using interaction models, we find that FOMC members with longer careers in government, industry, academia, non-governmental organizations (NGOs), or on the staff of the Board of Governors are more focused on output stabilization, while FOMC members with longer careers in the financial sector or on the staffs of regional Federal Reserve Banks are more focused on inflation stabilization. We also find evidence that politics matters, with Republican appointees being much more focused on inflation stabilization than Democratic appointees. Moreover, during the entire Clinton administration ‘natural’ monetary policy preferences of Bank presidents and Board members for inflation and output stabilization were more pronounced than under periods covering the administrations of both George H.W. Bush and George W. Bush, respectively.

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Notes

  1. Such dissenting views about monetary policy are often expressed in public speeches or congressional hearings and may have important implications, for example, for the returns to and volatility of financial markets (Blinder et al. 2008; Ehrmann and Fratzscher 2007a, 2007b; Hayo et al. 2012; Neuenkirch 2012) as well as the predictability of monetary policy decisions (Ehrmann and Fratzscher 2012; Ehrmann et al. 2012).

  2. Some studies examine the accuracy of aggregated forecasts of the FOMC (McNees 1995; Gavin 2003; Gavin and Mandal 2003; Gavin and Pande 2008; McCracken 2010).

  3. Bank presidents have cast dissenting votes more frequently than Board members (28 v. 13). Eighty-three percent of all dissents were cast in favor of tighter monetary policy and about 17 % in favor of easier monetary policy. Around 68 % of dissenting votes in favor of tightening were cast by Bank presidents and only 32 % by Board members. Around 71 % of dissents in favor of easing were cast by Bank presidents and only 29 % by Board members.

  4. The forecasts that were made prior to 1992 are not included in the Romer dataset since documentation is incomplete or it is unclear whether the forecasts are the initial or final ones (Romer and Romer 1998).

  5. For example, we match the individual forecasts of February1992 with the interest rate votes of the FOMC’s meetings in March, May, and June of 1992; and we match the individual forecasts of July 1992 with the interest rate votes of the FOMC’s meetings in August, October, November, and December of 1992, and February 1993.

  6. Twenty-nine real GDP growth forecasts reported in Table 1 are in line with such a hypothesized voting pattern, while we find contradicting evidence for only six forecasts; for the unemployment rate forecasts this ratio is 24:8 and for the inflation forecasts it is 26:5.

  7. Meade and Stasavage (2008) and Meade (2010) show that this policy change in 1993 affected voting behavior.

  8. The number of years spent working as Governor or Bank president is not included in the calculation.

  9. This coding procedure is also used in other works (Gildea 1990, 1992; Havrilesky and Gildea 1991; Chappell and McGregor 2000; Meade and Sheets 2005; Harris and Spencer 2009; Harris et al. 2011).

  10. We tested random effects ordered probit models but found only weak evidence of random effects. Moreover, from a theoretical point of view, the basic assumption of zero correlation between member-specific effects and other explanatory variables may be questionable. Moreover, we did not opt for introducing fixed effects since in a non-linear model, such as ordered probit, fixed effects may lead to the incidental parameters problem with possibly inconsistent estimators (Greene 2004).

  11. The PCPs and EPCPs remain fairly constant at high levels, owing to the large share of assents in our dataset.

  12. Marginal effects of the control variables as well as the marginal effects of the Bank presidents regressions and the Board members regressions are available upon request.

  13. A possible explanation for the relatively small economic significance of real GDP growth forecasts may be their relatively high standard deviation (see Table 8 in the Appendix reporting the summary statistics).

  14. This result may be explained by the supposedly closer de facto regional affiliation of the Bank presidents, as compared to the de jure regional affiliation of Board members.

  15. The detailed estimation results of the interaction models are available upon request.

  16. For dissents favoring tighter monetary policy we find largely insignificant marginal effects for the real GDP growth forecast of FOMC members with strong and weak career backgrounds in the government sector.

  17. A possible explanation may be that during the economically more unstable Republican administrations (Gulf War I, the bursting of the dot.com bubble) monetary policy decisions may have been more challenging and FOMC members may have felt duty bound to fall in line, irrespective of their inflation and real GDP growth forecasts. During the Clinton administration, the economic situation was more remote, which may have justified “informed” dissenting behavior driven by rational assessment of inflation and real GDP growth forecasts.

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  1. Faculty of Business and Economics, Technische Universitaet Dresden, 01062, Dresden, Germany

    Stefan Eichler & Tom Lähner

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  1. Stefan Eichler
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Correspondence to Stefan Eichler.

Appendix

Appendix

Table 7 Variable definitions and sources
Full size table
Table 8 Summary statistics (for the full sample)
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Table 9 Results of the marginal effects for the full sample
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Eichler, S., Lähner, T. Forecast dispersion, dissenting votes, and monetary policy preferences of FOMC members: the role of individual career characteristics and political aspects. Public Choice 160, 429–453 (2014). https://doi.org/10.1007/s11127-013-0099-1

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