Two regional Federal Reserve bank presidents are leaving their positions early in the wake of controversy over portfolio holdings. Boston Fed President Eric Rosengren and Dallas Fed President Robert Kaplan will depart over the next 10 days.
Rosengren announced his Sept. 30 departure early Monday, saying he needs a kidney transplant. He was due to retire in June next year and at the time of the statement there was speculation his involvement in the controversy over the portfolios and trading of Fed officials played a part in the decision.
Dallas Fed President Robert Kaplan's announcement that he would leave on Oct. 8 confirmed those suspicions as he said specifically he is leaving to eliminate distractions caused by his trading. Kaplan traded millions of dollars in securities last year, including individual high-valuation megacap stocks that benefit from lower interest rates. Rosengren came under scrutiny for securities tied to real estate and securities the Fed bought last year. Neither ran afoul of any of the current Fed rules on holdings and trading.
Fed Chairman Jerome Powell has opened an ethics panel over the issue and said at his recent press conference changes to current rules must happen. Powell reportedly also held securities that the Fed bought.
Dot plot shuffle: While a rare occurrence, the loss of two regional presidents underscores the dangers of a market trading as though the Fed is a static entity represented by its Summary of Economic Projections rather than a fluid group where minds can change quickly.
Along with the plan for asset tapering, the focus of the last FOMC was on the dot plot of rate forecasts that moved market expectations forward to an initial hike in 2022. Now two of those dots are going away. Rosengren and Kaplan are both in the hawkish camp, with Kaplan considered one of most hawkish voices for the Fed in calling for removal of accommodation. Two dovish replacements could quickly shift the dots back to liftoff in 2023. (District presidents are identified through a search committee formed by the respective bank).
When it comes to FOMC voting on rates, the rotation was set to bring in three hawkish regional presidents next year: Rosengren, St. Louis President James Bullard and Kansas City Fed President Esther George, as well as hawkish-leaning Cleveland Fed President Loretta Mester. And there could be further shifts in the Fed makeup. Powell's renomination is not secured. Although it looks like the continuity would please the markets, President Joe Biden could ensure more dovish leadership with Lael Brainard (voting members turn dovish in 2023 and Kaplan now won't be part of that class).
Vice Chairman Richard Clarida, a centrist, sees his term expire on Jan. 31, and Randal Quarles sees his position as vice chairman of supervision end on Oct. 13, although his term ends in 2032.
Markets still see policy on track. While the game of musical chairs is going on, the bond market is still expecting a global move to tightening as yields keep climbing. The 10-year Treasury yield is up 6 basis points to 1.54% this morning. The 5-year yield, most tied to fed funds rate expectations, is setting a new high for 2020, up 3 basis points to 1.03%.
The message coming from Fed speakers is still for tapering to start in November and end in the middle of next year. "Fed presidents exist to provide entertaining and extreme comments to the media, and to dissent from policy decisions only when permitted," UBS Chief Economist Paul Donovan writes. "New York Fed President Williams is the Fed president with authority (having a permanent vote on policy). Williams reiterated the market base case of a quantitative policy tightening this year, and pointed out that a US default would be less than ideal. Markets are well aware of both of these views."
In what could be seen as an extreme opinion, Chicago Fed President Charles Evans, who loses a voting slot next year, argued yesterday that the Fed may need to see more inflation. (
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