Bernanke tolerating dissent but pushing past it

WASHINGTON — For someone known as a consensus builder, Federal Reserve Chairman Ben Bernanke sure generates — and shrugs off — a lot of dissent.

Bernanke last month pushed ahead with a plan to keep short-term interest rates near zero through mid-2013 despite three dissenting votes on the Fed’s policy-making committee. For decades, the Fed’s culture, and sometimes its strong-willed chiefs, have normally capped dissents at two.

Former Fed Vice Chairman Alan Blinder, a Princeton economist, suggests that Bernanke’s willingness to accept three dissents last month has “broken the ice”: Bernanke won’t let resistance from several members stop him from pushing through bold moves that he and a Fed majority consider necessary.

It’s one reason many economists expect the central bank to announce something new after its policy meeting this week to try to jolt the sputtering economy.

Eventually, some economists expect the Fed to try for the third time to stimulate growth through a program to buy Treasurys to lower long-term interest rates. That’s a step known as “quantitative easing.”

Whatever step he proposes, Bernanke would surely prefer unanimous support, to avoid sending any mixed messages to financial markets. But the chairman, an even-tempered academic, doesn’t shrink from debate.

“My attitude has always been if two people always agree, one of them is redundant,” Bernanke said after a speech this month in Minneapolis. “I have always tried to encourage . debate and discussion.”

He hasn’t been disappointed. Bernanke hears plenty from dissenting committee members who worry that his efforts to energize growth and job creation with super-low interest rates are hurting savers and could ignite inflation.

Fed officials say the central bank remains collegial despite the dissension. They contrast Bernanke’s Fed with the leadership of former chairmen like Arthur Burns and Paul Volcker, who were known for imposing their will on colleagues.

“Sometimes we have different opinions, but it’s all very congenial and very professional,” one of the dissenters, Charles Plosser, president of the Federal Reserve Bank of Philadelphia, told The Wall Street Journal this month. “It’s not a vote of no-confidence in Bernanke ... This is about how difficult decision-making is right now.”

Outsiders have been less polite. Bernanke’s policies have come under fire from members of Congress and from Republican presidential candidates like Texas Gov. Rick Perry and Texas Rep. Ron Paul.

Bernanke still commands most of the votes on the policymaking Federal Open Market Committee.

“He’s the kind of guy who convinces people to go along with him,” says Rutgers University economist Michael Bordo. “He doesn’t bully them or browbeat them.”

Undivided or near-unanimous Fed decisions are designed to send a clear message to markets about the central bank’s intentions. In deference to tradition, committee members have sometimes cast votes with the majority despite their misgivings.

But the self-censorship carries costs, too, economists say. It deprives investors of useful information about the range of debate within the central bank and of hints about the direction of interest rates, according to a paper last year by Petra Gerlach-Kristen of the Bank for International Settlements and Ellen Meade of American University.

Since becoming chairman in 2006, Bernanke has opened the often-secretive institution to deeper public scrutiny, in part by giving regular news conferences after some meetings of the policymaking committee.

Bernanke, who studied the Great Depression as an academic, has already taken extraordinary steps to boost the economy and stabilize the financial system. During the 2007-2009 financial panic, the Fed made emergency loans to banks. Since December 2008, the Fed has kept short-term interest rates near zero.

And it’s conducted two rounds of quantitative easing to try to lower long-term rates. Lower rates are intended to coax consumers and businesses into borrowing and spending more. Low rates are also supposed to spur investors to shift money out of Treasurys and into stocks. Higher stock prices can make investors feel wealthy enough to spend more.

The Fed is a quasi-independent agency with two sometimes-conflicting missions: to keep inflation under control and to ensure maximum employment.

The 12-member policy committee, which sets interest rates, always includes five of the Fed’s 12 regional bank presidents; they serve on a rotating basis. The seven other committee members belong to the Fed’s board of governors in Washington, which has two vacancies.

The bank presidents are selected by local boards of directors dominated by bankers. These presidents are likelier than other members of the policy committee to be “inflation hawks.” That term refers to those who tend to worry that rates kept too low for too long could spark high inflation and hurt people who own bonds and other fixed-rate investments.

The three no votes last month all came from Fed bank presidents: in Dallas, Minneapolis and Philadelphia.

Until August, no Fed decision since 1992 had caused as many as three dissents on the policy committee. Economists say the level of disagreement isn’t surprising: It’s far from clear what more, if anything, the Fed should be doing to help lift the economy out of a low-growth, high-unemployment rut.

Yet the Fed remains under intense scrutiny because it seems to be the only U.S. financial institution capable of doing anything that might help the economy. Republicans in Congress are resisting the Obama administration’s effort to boost growth and create jobs with a new round of tax cuts and government spending. They say that the $447 billion White House plan wouldn’t work and that government can’t afford to let budget deficits grow any bigger.

`’The Fed is the only game in town,” says economist Marvin Goodfriend at Carnegie Mellon University’s Tepper School of Business. “That’s what’s created the stresses” within the bank and political pressure from outside.

Republican presidential candidate Perry has said it would be “almost treasonous” for Bernanke to do anything to help the economy before the 2012 presidential election.

Some economists say that the Fed has already used up all its ammunition with its zero-interest rate policy and its bond purchases. Skeptics say the Fed really can’t do much more to help the economy — and might hurt it by stoking inflation.

Despite the Fed’s efforts, unemployment is stuck at a recession-level 9.1 percent. And the economy grew at an annual rate of just 0.7 percent in the first half of the year. Four or 5 percent annual growth would be needed to bring the unemployment rate down rapidly.

Yet the Fed is expected this week to signal further action. Most economists expect it to reshuffle its $1.7 trillion portfolio of bonds and mortgage securities, replacing short-term investments with long-term bonds. That would be designed to further reduce long-term interest rates, leading to lower rates on mortgages and car loans and perhaps persuading wary consumers to spend more.

Or it could reduce or eliminate the 0.25 percent interest it pays on reserves that commercial banks keep with the Fed. Doing so could encourage some banks to lend more to businesses and consumers.

“The chairman will get done whatever he wants to do,” Rutgers’ Bordo says. “The disagreements are just putting more pressure on him to come up with a good case.”