Scrambling to flesh out skeleton Fed board

April 25, 2014

“It’s about time” was the general reaction when on Thursday the Senate Banking Committee scheduled a vote on Barack Obama’s nominees for the Federal Reserve board. Not that Stanley Fischer, Lael Brainard and Jerome Powell (a sitting governor who needs re-confirmation) have been waiting all that long; it was January that the U.S. president nominated them as central bank governors, and only a month ago that the trio testified to the committee. The urgency and even anxiety had more to do with the fact that only four members currently sit on the Fed’s seven-member board and one of those, Jeremy Stein, is retiring in a month. The 100-year old Fed has never had only three governors, and the thought of the policy and administrative headaches that would bring was starting to stress people out. After all, the Fed under freshly-minted chair Janet Yellen is in the midst of its most difficult policy reversal ever.

“Boy it would be more comfortable if there were at least five governors and hopefully more” to help Yellen “think through these very difficult communications challenges,” said Donald Kohn, a former Fed vice chair.¬†Former governor Elizabeth Duke, who stepped down in August, said one of the Fed board’s strengths is its diversity of members’ backgrounds. “With fewer people you don’t have as many different points of view on policy,” she said in an interview.

The Senate committee votes on the three nominees April 29. But they can’t start the job until the full Democratic-controlled Senate also schedules a vote and gives them the green light.

To be sure, there is no requirement for the Fed to have a full slate of seven governors. But it was something of a wake-up call when five presidents of the Fed’s regional branches voted alongside only four board governors at last month’s policy-setting meeting, when the central bank decided to revamp a delicate promise to keep interest rates low for a while to come. The privately-elected presidents, who often represent the extremely hawkish or dovish views on what to do about rates and asset purchases, will have an effective majority until more governors are confirmed. While the chair will seek to build the broadest support possible among fellow policymakers, “when the board is under-staffed the leadership needs to be that little bit more solicitous of the views of the presidents, who can dissent more freely,” said Krishna Guha, a former New York Fed official who now a vice chairman at ISI, a broker-dealer.

As it happened, there was only one dissenting vote on March 19, paving the way for Yellen to continue winding down the Fed’s massive bond-buying program, which is meant to stimulate investment and hiring. Next year, the Fed is expected to start raising rates after years of aggressive post-recession stimulus.

Beyond policy-making, the Fed acts as lender of last resort and directly supervises more than 850 banks. Since the 2007-2009 crisis, it is also responsible for ensuring financial stability. The governors technically oversee all of this, while also sitting on several internal committees.

The White House, which nominates Fed governors, has struggled to keep up in an era in which board members very rarely serve their full 14-year terms. Stein, for example, joined the Fed only two years ago. The terms are intended to be long enough to give even eight-year presidents only a partial imprimatur on the central bank. But in just over five years in office Obama has named all of the current governors, and will have two more spots to fill once Stein returns to Harvard University on May 28.

Narayana Kocherlakota, the dovish head of the Minneapolis Fed who cast the dissenting vote last month, told reporters in Rochester, Minnesota a few weeks later that it should be a “high priority” to fully staff the Fed board in part to enhance policy deliberations. “I would think that the Congress and the president would want to have that up to full speed in order to be able to do that job in the most effective way.”

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