The FOMC is comprised of up to twelve voting members: up to seven of them are from the Board of Governors plus the President of the New York Fed who is a permanent voting member and four members from the other eleven regional Reserve Banks who serve a one year term on a rotating basis. At the moment, the Board of Governors consists of 5 governors with 2 vacancies remaining. In 2020 Loretta Mester (Cleveland Fed President), Robert Kaplan (Dallas Fed President), Patrick Harker (Philadelphia Fed President), Neel Kashkari (Minneapolis Fed President) will become voting committee members. They replace the two hawks Eric Rosengren and Ester George who dissented against all 3 of the Fed’s rate cuts last year and James Bullard and Charles Evans who were doves.
Kashkari is seen as a dove favouring rate cuts last year and has advocated not raising rates until inflation is above 2% on a sustained basis. Kaplan is seen as more of a centrist and said in a recent interview on CNBC: “I don’t think we should be making any moves at this point on the fed funds rate” and while he would be prepared to let inflation run above the 2% target for a time he would also be considering factors such as financial stability and excess balances.
But even Mester and Harker who are seen as having a hawkish tilt and were sceptical of the need for three rate cuts in 2019 appear to have mellowed their views of late. Mester recently commented “I think we are really well calibrated now” and that she does not see a rate rise as being required “until I see either financial stability issues looming or some indication that inflation is going to pick up strongly. I don’t see that now and it is not in my forecast.” She emphasised that ‘“You want to see that inflation really is at 2%. You want persistence.” Harker recently stated that while he would have dissented from the October 2019 rate cut he was “I’m of the mind we stay put now and see how things work out”.
The Fed’s December median ‘dot plot’ projection forecasts no change in the Fed Funds rate for 2020 and the December FOMC meeting confirmed the Fed is currently on hold and remains data dependent as it evaluates the impact of the cuts in 2019. Our base case remains that the Fed will have to cut rates again this year as we expect US economic growth to remain anaemic while the inflation backdrop remains benign. Against this backdrop, we continue to see scope for the US Treasury yield curve to flatten and continue to favour positioning at the longer end of the curve.