Fed: George gets surprise vote on rates, makes hikes more likely

Esther
George, president and chief executive officer of the Federal
Reserve Bank of Kansas City, attends a symposium at the Jackson
Lake Lodge in Grand Teton National Park near Jackson,
Wyo.

AP/John
Locher

• Shifts in staffing at the Fed, in particular a surprise
  vote to alternate member Esther George of the Kansas City Fed,
  makes the central bank more likely to keep raising interest
  rates beyond what markets are currently
  expecting. 
• George has become a voter because ex-San Francisco Fed
  President John Williams moved over to
  the New York Fed to become its president. 
• Wall Street is pricing in just two more rate hikes from
  the Fed this year, but policymakers are forecasting additional
  increases well into next year. 

What a difference a job opening makes.

A curious staffing quirk at the highest levels of the
Federal Reserve suddenly makes it more likely that the central
bank will be more aggressive about raising interest rates than
Wall Street is expecting.

Here’s what happened: William Dudley stepped down as
president of the New York Fed, the one regional central bank that
has a permanent vote on the rate-setting Federal Open Market
Committee; John Williams, the former president of the San
Francisco Fed, was picked for that job
under highly unusual circumstances after having reportedly
been rejected by President Donald Trump as Federal Reserve vice
chair; Williams’ departure from the San Francisco Fed, which has
a vote on the FOMC this year, gives the hawkish president of the
Kansas City Fed, Esther George, a surprise vote on interest
rates.

Some key background: The FOMC is composed of 19 members
(when at full mast) and 12 voting members. The Fed’s board has as
many as seven presidentially appointed governors, and they all
have a permanent vote on interest rates. The 12 regional district
bank presidents, who are appointed by their boards of directors,
get rotating votes on the FOMC.

So here’s how it plays out, according to Ward McCarthy,
chief financial economist at Jefferies:

“With John Williams on board as the NY Fed President, vice
chairman of the FOMC and, consequently, a permanent voting FOMC
member, the San Francisco Fed vote will rotate to alternate FOMC
member Esther George of Kansas City,” he writes in a research
note.

“Esther George is scheduled to be a voting member in 2019
as well, giving the FOMC a very hawkish presence for the next 1-½
years.”

The Kansas City Fed has historically advocated for higher
interest rates than other regional Fed banks, although that call
proved all too wrongheaded during the last recession, when the
bank was led by FDIC Vice Chairman Thomas Hoenig.

What does this mean for rates in practical terms? The Fed
has tightened monetary policy several times starting in December
2015 after a prolonged period of zero interest rates during and
after the Great Recession. Financial markets expect the Fed to
hike just twice more — in September and December — and then be
done with it. However, policymakers’ own forecasts point to as
many as three additional hikes next year.

There’s one caveat, however, which McCarthy unearths from
deep inside the FOMC’s official Rules of Organization.

These allow “for the boards of directors in San Francisco,
Kansas City and Minneapolis to hold a special election to allow
San Francisco Fed first vice president Mark Gould to vote over
the balance of 2018 rather than the alternate, Esther George,” he
wrote. “That has not been the precedent, however.”