Fed Chairman Bernanke commented on the monetary policy outlook at a speech at the NBER a couple of weeks ago, and then again in Congressional Testimony. He gave a clear signal that the current voting members of the FOMC plan to maintain a highly accommodative overall stance of monetary policy for some time. These remarks led to an unwind of some of the recent increase in longer-term interest rates.

The problem is that Fed communications reveal a clear split on the FOMC. The most glaring instance of this is that according to the FOMC minutes, about half of the participants at the last meeting expected to stop asset purchases this year, while the Chairman has presented a timeline that envisions them continuing into 2014, conditional on the economy healing as expected.

Much of this has to represent a disagreement between those who are currently voting members of the FOMC and non-voters (the term “participants” includes both). But if we want to predict what the Fed will do in 2014, it is the voters in 2014 that matter. The composition of the FOMC in 2014 will be very different from what it is today, and more hawkish.

Among the five regional Fed presidents that will be voting are Fisher, Plosser and Pianalto, all of whom have signalled in speeches that they are in a hurry to end asset purchases. Jeremy Stein will still be there, and Jerome Powell might be (his term ends at the end of January). Both of these seem to have been pushing the Fed in a hawkish direction. There’s a reference in the last minutes to two voting members wanting to curtail purchases relatively soon, and I am guessing that their names are Powell and Stein. So straight away in 2014, there could be 5 voting members who I suspect would in their heart of hearts like to stop asset purchases yesterday. Elizabeth Duke has resigned and others could leave soon. Most importantly, Bernanke himself is unlikely to be there: his successor will not be more dovish than him.

What I think it all means is that unless there is a new crisis (from Europe or China), or a sharp slowdown in the US, tapering will start in September and the asset purchase program will be wrapped up early in the new year. After that, the next move is a tightening of the federal funds rate. I woudn’t expect that to happen for quite a while. Still with a hawkish committee evidently heavily rethinking the role of asset bubbles in monetary policy, I would not be at all surprised to see a historically-normal term premium returning to interest rate futures and bond markets.