Thursday, June 12, 2014

Turnover on the Federal Reserve Board of Governors

In August 2013, the Federal Reserve Board of Governors, the key decision-making authority, had a full complement of seven members. Since then, four of them have resigned and one had their term in office expire, meaning that President Obama has found himself with a need to fill five slots. Here's the membership from August 2013:

The prospect of having one president appoint five of the seven positions on the Board of Governors at about the same time is not how this institution is supposed to work.  Each member of the Board of Governors is appointed to a 14-year nonrenewable term, with confirmation required by the U.S. Senate. This pattern is intended to guarantee that the president can make a new appointment once every two years.

But the reality of terms and appointments to the Fed has one key difference from how it is drawn up on paper. People often leave terms early--that is, in less than 14 years. In that case, the replacement appointee serves out the remainder of that term, and the replacement then can be appointed to their own 14-year term after that. For example, Alan Greenspan first joined the Federal Reserve Board of Governors in 1987 and served out the remainder of the term that expired in 1992, before then being appointed to his own 14-year term which expired in 2006. Ben Bernanke was filling out a partially completed term at the Fed when he was a member from 2002-2005, but was then appointed to his own 14-year term in 2006.

So far, President Obama has appointed Stanley Fischer, who was confirmed by the U.S. Senate for a spot on the Board of Governors on May 28, but needs to be confirmed again to become vice-chair. The president has sent the Senate two other nominations: one for Jerome Powell to begin his own 14-year term, and Lael Brainerd, who had been undersecretary of international affairs at the U.S. Treasury. Powell and Brainerd are wending their way toward confirmation votes before the U.S. Senate. But even if or when they are confirmed, two of the seven slots on the Board of Governors will be empty. [Added: Powell and Brainerd were confirmed by the Senate today, June 12.]

The Federal Reserve has highly competent staff, and it can certainly continue to operate with its current complement of three official members (or four, given that Powell is continuing to serve while waiting to be confirmed to a new term). But the rationale for a seven-member board rotating on a 14-year cycle is that debate and discussion among a cohesive group are important to diagnosing the economy and to making policy decisions in this area, and that there is a value in continuity of experience with a slow and occasional inflow of fresh voices.

The Fed faces a number of tough decisions in the next few years: when and how to back away from policies of quantitative easing and return interest rates to more historically normal levels; how to deal with its new regulatory and consumer protection responsibilities in the aftermath of the Dodd-Frank financial reform legislation; and more broadly how to think about U.S. monetary policy in a globalizing economy where the euro is a soap opera and the U.S. economy is a decreasing share of world output. Although the new arrivals at the Board of Governors are certain to have background experience in at least some aspects of central bank operations already, the only way to accumulate experience on the job is actually to do the job.

There's no particular blame to be placed here for the high level of turnover at the Fed. But it's not how the institution is supposed to work. Here's my pledge: In the extremely off-chance that I am nominated to fill one of the vacant Board of Governor slots, I will only accept with the intention of serving the full 14-year term.