Federal Reserve Chair Janet Yellen has announced she will resign her position as a member of the Board of Governors when her term as Chair expires in early 2018. Although current Governor Jerome Powell has been appointed to take her place as Chair, Yellen’s departure will leave only three Governors to conduct all Board functions. President Trump and Congress should move swiftly to nominate and confirm candidates to fill the four vacant Governor positions.
The design of the Federal Open Market Committee (FOMC), which makes monetary policy decisions, strikes a balance of power between the seven Governors, who are appointed by the President and confirmed by Congress, and the twelve Reserve Bank Presidents, who are appointed by their Banks’ own Board of Directors subject to approval by the Governors. All Governors serve as voting members of the FOMC, while the Bank Presidents vote on a rotating basis so that, under normal circumstances, the Governors hold a seven-to-five majority of the FOMC’s votes. With four Board vacancies, however, this balance of power has shifted, with the Presidents, instead, in a five-to-three majority. Filling the Board vacancies to restore the Governors’ majority would maintain the integrity of the policymaking system as originally designed, and should therefore be a priority.
Bringing the FOMC back to full strength with a new slate of Governors is especially important. As the lingering effects of the Great Recession continue to fade, monetary policymakers will have the chance to step back and reconsider the strategies the Committee adopted, under pressure and duress, during the financial crisis of 2007-2008 and the prolonged period of zero short-term interest rates that followed. Basic issues, such as the setting for the long-run inflation target, the appropriate size of the central bank’s balance sheet, and the design of a new policy framework that deals more effectively with the zero lower interest rate bound, will all be open to debate. Even before joining the Board, Chair Yellen and former Vice Chair Stanley Fischer were greatly respected economists and experienced senior policymakers. Given the present high stakes, President Trump should work with Congress to identify equally qualified replacements.
Less well known to the public, but very important nonetheless, are the functions of the Board of Governors that extend beyond their role on the FOMC. Because the Fed also has responsibility for bank supervision and regulation, community banking, financial stability, consumer and community affairs, and business of the regional Reserve Banks and the Board itself, the Board has eight committees to oversee all its functions. With a full complement of Governors, it would be typical for each to serve on two or three committees. But when the Board consisted of Chair Yellen and three Governors, Vice Chair Fischer served on four committees, Governor Powell on five, and Governor Lael Brainard on seven. With only Governor Brainard and new Governor Randal Quarles remaining, it appears as if they will serve on all eight committees. The President and Congress are demanding far too much of them by leaving so many Board seats vacant.
The current situation is unusual in its severity, but it is not new. The Board was fully staffed with all seven members in April 2006 and again in May 2012 but, shortly after both dates, resignations and subsequent delays in filling these vacancies left the Board shorthanded. The problem of staffing has become more persistent in recent years because people appointed to the Board have tended to serve for very brief periods, often as little as two years. This service stands in sharp contrasts to the fourteen year terms to which members are appointed and the longer terms of actual service that were more common several decades ago. Discussions of Fed reform have rightly included suggestions to minimize this kind of turnover. Pending new legislation, however, the President and Congress should place special emphasis on finding Board nominees who show an inclination to remain at their posts for more than a few years.
The Federal Reserve typically is viewed as the most important and powerful agent of economic policy in the United States. Indeed, Congress believes the Fed exerts sufficient influence over economic performance to have tasked it with the dual mandate of stable prices and maximum employment. Moreover, the Fed has regulatory power over nearly 5,000 bank holding companies as well as many smaller financial institutions, responsibility for the sound functioning of the payments system, and, during financial crises, the provision of liquidity for the banking system. For all of these responsibilities, recent Presidents and Congress have shown something between indifference and neglect in their approach to staffing the Board of Governors fully and expeditiously as vacancies occur.
President Trump could change this, very much for the better, by appointing four new Governors to the Board as soon as possible.
Michael Belongia is a professor of economics at the University of Mississippi. Peter Ireland is a professor of economics at Boston College and a member of the Shadow Open Market Committee.
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