Jerome Powell is now officially the Federal Reserve board chairman, inheriting the job of raising interest rates and shrinking the Fed’s balance sheet from his predecessor, Janet Yellen. Unfortunately, he also inherited empty chairs in the boardroom.
When fully staffed, the Federal Reserve board consists of a chair and six governors. With Yellen’s resignation, Powell is now four governors short of the full complement of six. Yellen also was required to operate the Fed short by three or four board members.
President Donald Trump has begun nominating people to fill board vacancies. This is a positive development, but it is going very slowly.
Not having a fully staffed Federal Reserve board is problematic for four reasons:
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▪ The Fed relies on the committee structure in operating and managing our central bank, the best known of these being the Federal Open Market Committee, or FOMC. About 20 percent of the Fed’s annual expenses of $4.2 billion are directed to funding the FOMC. The remaining 80 percent pays for everything else it does, including operating the nation’s payments mechanism, supervising and regulating banks, and acting as the Treasury Department’s banker.
These responsibilities are managed by six board committees that oversee multiple departments: Board Affairs, Consumer and Community Affairs, Economic and Financial Monitoring and Research, Federal Reserve Bank Affairs, Supervision and Regulation, and Payments, Clearing, and Settlement. Board members are assigned to these committees, either as chairman or as a member, by the Fed chair. Thus, anything less than a full complement of six board members results in understaffing of these committees.
▪ The president appoints the seven member Fed board with the consent of the Senate, whereas Fed bank presidents are selected by their boards of directors and approved by the Fed board. Eligible voting members on the FOMC are the seven Board members and five Fed bank presidents. This means that at least six of the board member positions must always be filled, including the chair, to retain control of monetary policy within the hands of those appointed by the people’s elected officials.
▪ Despite there being a tendency to seek, nominate, and confirm persons with economic backgrounds to the Fed board, 80 percent of what it does would benefit from having members with other backgrounds, including banking, management, and legal. This also likely would improve the quality of the FOMC’s monetary policy.
▪ Current law establishes the minimum number of board members required to effect certain financial emergency actions, and it has been below these numbers for some time.
For these reasons, it is essential for Trump to assign a high priority to nominating qualified people to fill the six board member positions, and for the GOP-controlled Congress to confirm them in order to facilitate new Fed chair Powell’s successful transition by fully staffing our central bank’s executive offices for the first time in years.
Let’s not make his job more difficult than it already is, especially given the stock market’s recent irrational pessimism triggered by inflation concerns.
Jim Kudlinski of Overland Park is a former Federal Reserve Board official and author of “The Tarnished Fed.”