4Alpha Research: The Federal Reserve shifts to balance and "external consistency," but remains conservative in its attitude towards Crypto

As the Federal Reserve's FOMC meeting on July 30 approaches, Fed officials have entered a quiet period. The market, which has fully priced in the expectation of interest rate cuts, is now eagerly awaiting the new interest rate decision and the Fed's policy statements. Seizing this opportunity, this article reviews the composition of the current FOMC voting members, the evolution of the FOMC's composition in recent years, and the Fed's policy stance towards the cryptocurrency industry.

Opinions in a nutshell

• The composition of the FOMC voting members is tending towards balance and neutrality, with 7 permanent members holding permanent voting rights, while the regional Fed presidents rotate to occupy the remaining seats. Among the current FOMC voting members, most permanent voters are seen as neutral. This year's rotating members include two doves and two hawks, while the new members consist of two hawks, one neutral, and one member with fluctuating views, overall continuing the trend of neutrality in the FOMC's composition.

• The trend towards neutrality in the FOMC makes the Fed's policy stance generally balanced and neutral, which helps the Fed execute monetary policy independently and better balance the relationship between inflation and economic growth. The Fed's neutral and cautious attitude helps restore its professional, independent, and authoritative image, but the reduced internal debate may also increase the risk of policy missteps.

• Regarding its stance on cryptocurrencies, Fed officials generally hold a negative view. Although cryptocurrencies are gradually moving towards compliance in the U.S. financial market, Fed officials emphasize that due to the extreme price volatility and lack of stability, the fundamental requirements for cryptocurrencies to function as money have not been met. Furthermore, the global acceptance and regulatory maturity of cryptocurrencies are insufficient for them to become a universal means of payment. Fed officials also point out that innovations in stablecoins should occur within a strict regulatory framework, reflecting the Fed's cautious attitude towards the cryptocurrency industry, as the Fed does not wish to introduce new exogenous uncertainties into the monetary policy decision-making process.

I. The composition of the 2024 FOMC tends towards balance and neutrality

Among the 12 FOMC voting members, 7 are permanent members (Governors) with permanent voting rights during their terms. Currently, these 7 include Fed Chair Jerome Powell, Vice Chair Philip Jefferson, Vice Chair Michael Barr, Governor Christopher Waller, Governor Lisa Cook, Governor Adriana Kugler, and Governor Michelle Bowman, along with New York Fed President John Williams.

Only the New York Fed President is a permanent voting member among the regional Feds, while the remaining four seats are rotated among other regional Feds. This term includes Cleveland Fed President Loretta Mester, Richmond Fed President Thomas Barkin, Atlanta Fed President Raphael Bostic, and San Francisco Fed President Mary Daly, while Chicago Fed President Austan Goolsbee, Philadelphia Fed President Patrick Harker, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie Logan have rotated out.

Among the permanent voting members of the current FOMC (January 2024), Bowman is generally considered a hawk, while Cook and Kugler are seen as doves, with the others leaning neutral. Among the rotating members, this year saw the rotation of two doves and two hawks (Goolsbee and Harker representing the doves and moderate doves, while Minneapolis Fed President Kashkari and Dallas Fed President Logan are two new "hawk kings"). The new members include two hawks (Mester and Barkin), one neutral (Daly), and one member with fluctuating views and a long-standing controversial stance (Bostic).

Overall, the incoming and outgoing members this year maintain a slightly hawkish tilt while preserving the factional balance of the Fed's voting members, as shown in the figure below. The slight hawkish inclination also aligns with the Fed's current need to conclude a year-long battle against inflation and prevent a rebound in inflation.

The relatively balanced factional situation is also reflected in the current monetary policy of the Fed. In recent years, the FOMC's interest rate decisions, dot plots, and future outlook have shifted from the aggressive stance of the pandemic era (for example, the Fed's unusually large 50bp rate cut on March 3, 2020, outside of FOMC meetings) to a more smooth and cautious approach. Additionally, Fed officials' public statements have become much less sharp compared to previous years.

For instance, Fed Chair Powell, who consistently emphasized "inflation is transitory" after 2020, faced repeated backlash and ridicule. Currently, his statements rarely include such definitive assertions, leaning more towards ambiguous and vague expressions, which also provides ample room for interpretation by media outlets like the "New Fed News Agency."

The Fed's trend towards balance and neutrality generally helps it to be more independent and better serve as a monetary policy stabilizer, effectively achieving the trade-off function between inflation and economic growth. The Fed's past aggressive monetary policies and balance sheet decisions (such as the massive QE expansion in 2020) and some overly dogmatic and imprecise statements have severely damaged its professional, independent, and authoritative image, which can significantly weaken the forward guidance effect of the Fed's statements and decisions, leading to partial ineffectiveness of monetary policy. After all, to some extent, monetary policy is about managing market expectations. Since mid-2023, the Fed's neutral and cautious attitude has played a certain role in recovery, and the Fed's neutrality and more balanced process primarily began with personnel balancing and depolarization.

II. The disappearance of dissenting votes among FOMC members: Is it entirely a good thing?

Since Powell's era, the number of dissenting votes among FOMC members has steadily decreased. During Powell's nearly six years as Fed Chair, dissenting votes accounted for only 2.6% of the total votes, the lowest level since the Volcker era. Since the onset of the pandemic in March 2020, dissenting votes have become even rarer, making up only 1.4% of the total votes.

Andrew Levin, an economics professor at Dartmouth College and former Fed official, stated, "The internal dissent within the FOMC is gradually disappearing; the FOMC looks more like a corporate board than a public decision-making body." Former St. Louis Fed President James Bullard was one of the officials who frequently cast dissenting votes during his time on the FOMC. According to Fed data, Bullard cast dissenting votes in June 2013, September and June 2019, and March 2022.

Some argue that Powell's affable and diplomatic personality, along with his ability to maintain complex interpersonal relationships, may be a factor in the low rate of dissent within the Fed since he took charge. FOMC voting members may also worry that, in a politically fragmented Washington, public tolerance for a Fed with internal discord may be very low. Concerns about personal careers among FOMC members are understandable, but as Bullard noted, the herd mentality and excessive external unity within the Fed may lead to a failure of the FOMC's decision-making mechanism and result in policy missteps. Similar to the consensus in the crypto world that "centralization" can harm economic operations, the "centralization" of the FOMC is likely to undermine its monetary policy sensitivity and timeliness of adjustments, compromising the effectiveness of its voting-based decision-making mechanism. However, the dangers of "centralization" are rarely acknowledged in the traditional financial world.

III. Fed officials' overall negative attitude towards cryptocurrencies

Although with the launch of the BTC spot ETF at the beginning of 2024 and the recent listing of the ETH spot ETF, cryptocurrencies are moving towards compliance in the U.S. financial market at an unprecedented speed, Fed officials' public statements regarding cryptocurrencies remain predominantly negative in recent months.

On November 17, 2023, Fed Vice Chair and permanent voting member Barr stated that due to the cautious attitude of most banks, the U.S. banking system has not been severely affected by cryptocurrency risks. However, regulators must still be very careful with stablecoins, as historically, if regulation is poor, private currencies can have explosive influence. Innovations in stablecoins can be allowed but must be clearly regulated within a very explicit regulatory framework, which effectively negates one of the initial important motivations for on-chain finance in web3.

On February 27, 2024, Fed Vice Chair and permanent voting member Jefferson further stated that viewing cryptocurrencies as money is a mistake. He emphasized that although cryptocurrencies have shown trading capabilities in specific scenarios, their extreme price volatility and lack of stability make it difficult to meet the basic requirements of money, namely as a store of value and unit of account. Additionally, he mentioned that the global acceptance and regulatory maturity of cryptocurrencies have not reached the level necessary for them to become a universal means of payment, and the anchoring tendency of crypto stablecoins to the dollar also reflects their lack of other solid valuation bases.

Fed Governor and permanent voting member Bowman has also repeatedly stated that the development of dollar stablecoins must involve the Fed and various levels of federal government, and Congress still does not recognize stablecoins. These views reflect the Fed's cautious attitude towards cryptocurrencies and may influence future policy formulation. The Fed's choice to maintain a very conservative stance today, despite the full shift of cryptocurrencies towards compliance, may stem from its need to maintain short-term market stability. As a monetary policy maker, the Fed is already facing too many uncertain factors (external supply shocks, difficult-to-measure employment elasticity, an uncertain interest rate transmission chain, and the long-debated multiplier effect). The backgrounds of the Fed voting members also have no intersection with the crypto world, and in an already very troublesome decision-making process, they clearly do not welcome the addition of cryptocurrencies and dollar stablecoins as new uncertain variables.