A Long History of FOMC Voting Behavior.

• Author: Chappell Jr., Henry W.

Henry W Chappell, Jr. [*]

Rob Roy McGregort [+]

We devise and apply a method for estimating, monetary policy reaction functions for individual members of the Federal Open Market Committee (FOMC) of the Federal Reserve. Our method uses members' votes on the monetary policy directive in FOMC meetings as the key source of data on individual preferences. The analysis provides a ranking by preference for ease for 84 FOMC members who served during the 1966-1996 period.

1. Introduction

   In the literature on monetary policymaking, one frequently encounters references to "the central banker," "the monetary authority," or "the policymaker." The choice of language is not accidental. It accurately conveys two related messages about the state of that literature. One is that monetary policymaking is typically modeled in an institutionally naive manner. The second is that modelers implicitly assume that policy is made by a single decision maker, who presumably has stable preferences. For some purposes, this modeling environment may be appropriate, but if one wishes to describe real-world policymaking, it is surely inadequate.

   In the United States, the most important monetary policy decisions are made by the Federal Reserve's Federal Open Market Committee (FOMC). This committee is composed of the seven members of the board of governors, including the chairman and five of the twelve district Federal Reserve Bank presidents. Governors are appointed to staggered 14-year terms by the president, while bank presidents are selected by bank directors and periodically rotate on and off of the FOMC. [1] The FOMC guides monetary policy through its adopted directives, which must be approved by a majority vote at regularly scheduled meetings. Clearly, the monetary authority (the FOMC) is not a single agent with immutable preferences. It is a committee whose decisions reflect an aggregation of preferences over a diverse and changing membership.

   There have, of course, been studies investigating the internal dynamics of decision making at the fed. Many of these have analyzed patterns of voting on the monetary policy directive within the FOMC, concentrating on differences in the voting behavior of various groups of committee members. [2] In the past, differences among the governors and the bank presidents have led to widely publicized conflicts within the FOMC over whether to respond more actively to a sluggish U.S. economy. As reported by David Wessel in the Wall Street Journal of June 26, 1992,

   President Bush's appointees--Mr. Mullins, Mr. Lindsey, and Susan Phillips--are said to be ready to push [interest] rates down again. They have at least a couple of allies among the presidents of Fed district banks.[ldots] They also face substantial opposition.[ldots] Two of President Reagan's appointees to the Fed, Wayne Angell and John LaWare, seem firmly opposed to further rate cuts.[ldots] What's more, two of the five district-bank presidents who currently vote on monetary policy--newcomer Jerry Jordan of Cleveland and Thomas Melzer of St. Louis-- [ldots] worry that the Fed may already have gone too far [in easing monetary policy]. (p. A7)

   Such anecdotal evidence concerning the monetary policy decision process, along with the evidence provided by the dissent voting record, suggests that focusing on groups of FOMC members and their influence over monetary policy may sometimes obscure important differences among individuals within these groups. It also shows that an improved understanding of monetary policymaking requires investigating the motivations of specific individuals.

   In this paper, we document the voting behavior of individual FOMC members over the 1966-1996 period. Specifically, our results provide a ranking by preference for ease for 84 individuals who served on the FOMC during this period. To accomplish our objectives, we estimate parameters of individual FOMC members' monetary policy reaction functions. These reaction functions describe empirical relations between macroeconomic conditions and individuals' desired settings of a monetary policy instrument. We use members' votes on the monetary policy directive as the key source of data in revealing individuals' desired policies.

   The Memoranda of Discussion for FOMC meetings through March 1976 and transcripts of committee meetings held since March 1976 reveal information about members' desired policy actions that is more detailed than that revealed by voting records alone. [3] Unfortunately, the fed has not yet released transcripts for the 1978-1981 period, and transcripts for the period since 1993 are still subject to a five-year holding period prior to release. Using the published voting record therefore allows us to consider a longer sample period than would be possible based on the Memoranda and transcripts. Further, changes over time in Federal Reserve operating procedures affect the character of the committee's monetary policy discussions. For example, under the federal funds rate targeting procedure used during the 1970s, FOMC members frequently stated the target level of the funds rate that they preferred to see adopted. Under the borrowed reserves targeting procedure used during the 1980s, FOMC members typically stated the t arget level of reserve borrowings that they preferred to see adopted. Differences such as these affect our ability to consistently extract comparable information about committee members' positions on the appropriate course for monetary policy from the textual record. Inevitably, then, some degree of subjectivity will be involved in trying to code members' positions in detail. The use of voting records helps us avoid any systematic biases that this subjectivity might create.

   We begin by presenting our model in the second section. The empirical specification and the data set employed in the analysis are described in the third section. Results are discussed in the fourth section, and conclusions are offered in the final section.

2. A Model of FOMC Decision Making

   In this section we describe a model of FOMC decision making that permits reaction function parameters to vary across committee members and that can be estimated using available macroeconomic time series and FOMC voting records. Our approach offers three fundamental advantages over previous studies of monetary policymaking. First, our empirical model links policy outcomes to the reaction functions of FOMC members, providing microfoundations for aggregate reaction functions. Second, specifying differences across members as differences in reaction function parameters implicitly controls for the state of the economy and for prevailing policy when evaluating members' voting records. Third, differences across FOMC members can be interpreted as differences in desired settings of a policy instrument, which are more meaningful indicators of policy preferences than dissent voting frequencies. Our presentation proceeds by discussing the specification of policy preferences of individual FOMC members, the connection betw een those preferences and resulting policy outcomes, and issues associated with estimation. [4]

   Individuals' Reaction Functions

   We assume that individuals occupy N positions on the FOMC (excluding the position of the chairman). [5] Each of the N members is assumed to have a desired interest rate reaction function of the following form: [6]

   [[r.sup.*].sub.it] = [[alpha].sub.0] + [[[sum].sup.k].sub.k=1] [[alpha].sub.k][D.sub.kit] + [[[sum].sup.J].sub.j=1] [[beta].sub.j][X.sub.jt] + [e.sub.it], i = 1, [ldots], N; t = 1, [ldots], T. (1)

   The dependent variable, [[r.sup.*].sub.it], is member i's desired federal funds rate for the inter-meeting period following meeting t. This variable is unobserved. The independent variables, [X.sub.jt], j = 1, [ldots], J, are those that vary over time but not across members. Among these are forecast values of macroeconomic variables of concern to the fed (e.g., inflation, unemployment, and economic growth). The remaining independent variables, [D.sub.kit], k = 1, [ldots], K, vary across both members and time and can include dummy variables indicating specific individuals who served on the FOMC during the chosen sample period. [7]

   We specify a similar desired interest rate reaction function for the chairman (who is indicated by the position index 0):

   [[r.sup.*].sub.0t] = [[delta].sub.0] + [[[sum].sup.M].sub.m=1] [[delta].sub.m] [C.sum.mt] + [[[sum].sup.J].sub.i=1] [[beta].sub.j][X.sub.jt] + [e.sub.0t], t = 1, [ldots], T. (2)

   Equation 2 contains a series of dummy variables, [C.sub.mt], m = 1,[ldots], M, indicating specific chairmen (e.g., Bums, Miller, Volcker, and Greenspan). We assume that coefficients of the [X.sub.jt] are identical for chairmen and other members.

   Error terms for the reaction functions in Equations 1 and 2 are assumed to be identically distributed normal random variables, which are uncorrelated over time but correlated across individuals at a given meeting:

   E([e.sub.it])= 0, E([[e.sup.2].sub.it]) = [[sigma].sup.2], for i = 0, [ldots], N, t = 1, [ldots], T,

   E([e.sub.it][e.sub.js]) = 0 for t [neq] S, E([e.sub.it][e.sub.js]) = [rho][[sigma].sup.2] for i [neq] j,

   where [rho] measures the correlation between different individuals' contemporaneous reaction function error terms.

   Monetary Policy Choices and FOMC Voting

   Monetary policy directives are adopted by a majority vote of the FOMC at regularly scheduled meetings of the committee. The discussion of monetary policy usually begins with a report from the board staff, which covers economic forecasts and presents alternative policy options. Members then offer comments in the course of the policy go-around, which is followed by general discussion. The chairman, or a member designated by the chairman, then proposes wording for the policy directive. The actual directive may be Purposefully vague, but we assume that it embodies an implicit target for the federal funds rate. [8] The chairman plays a...