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Barb Rehm

The Intriguing Implications of the Fed Chair Battle

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President Obama says he'll announce his decision on the next Federal Reserve Board chairman "in the fall."

Let's hope he means September, especially if he selects the irascible Larry Summers. I also hope the president is thinking hard about who else he wants to serve on the seven-member Fed board. 

(To see more posts from Barb Rehm's Blog, click here.)

The Senate confirmation process is now a nightmare, and if the president wants a Fed chairman confirmed by the end of January, when Ben Bernanke's term ends, he needs to move sooner rather than later.

But what happens if a new Fed chair isn't confirmed by Jan. 31?

Assuming Bernanke hasn't already bought plane tickets to some secluded paradise where he can escape all second-guessing, he could stay on – but not as chairman. Bernanke's term on the board runs through 2020, but his term as chairman ends Jan. 31, and under the Federal Reserve Act he must cede that role. 

Here's the kicker: under the law, the vice chairman is then elevated to chairman. So if Obama selects Summers and he is not confirmed by Jan. 31, Janet Yellen would be acting chairman. Talk about revenge. Of course this scenario assumes Yellen hasn't simply quit out of frustration by that point.

If Yellen is Obama's pick, then her vice chairman role would be vacant and the president would have to nominate her successor.

Obama already has two other governors to replace: Betsy Duke, who is retiring; and Sarah Bloom Raskin, who is moving to the Treasury Department. 

That would bring the board down to four members, and Jay Powell's term as a governor ends in January. He may stay on, but if he doesn't, the Fed's second floor is looking mighty lonely.
Some might think none of this matters because the Fed chairman runs the show and the only governor with any power is Dan Tarullo, who single-handedly controls bank supervision.

I mostly agree. Powell and Jeremy Stein are articulate, capable men but aside from a couple of provocative speeches they've barely made a dent in Washington.

Which brings me back to Raskin. She's leaving the board of the most powerful central bank on the planet to be deputy Treasury secretary? She must be making the move because she thinks she'll have more impact at Treasury, and that's sad.

The Fed would be wise – and a whole lot more interesting – if it took the handcuffs off its governors. Public policy, aired in the open, is likely to be more effective.

Apathy about a thinning Fed board does overlook a notable repercussion. 

If the Fed board is whittled to four members, the dynamics of the Federal Open Market Committee will certainly shift. Federal Reserve Bank presidents would have a majority vote on FOMC.

At full power, the FOMC has 12 members: the seven Fed governors and five bank presidents.

If the Fed were down to four members, then the bank presidents would outnumber them on the monetary policymaking committee. I'm not saying that's a bad thing, necessarily, but it would certainly be a change.

And it would be a change at a crucial time in policymaking as the Fed grapples with how and when to contract the money supply.

There is one other piece to this puzzle.

Rep. Kevin Brady is pushing a bill that would set up a bipartisan committee to review how the Fed does its job. You may not know Brady because he isn't on Financial Services. But the Republican is a senior member of the House Ways and Means Committee and the third Texan to chair the Joint Economic Committee. (The other two are famous in financial services: Sen. Lloyd Bentsen, who became President Clinton's Treasury secretary, and Wright Patman, the legendary House Banking Committee chairman from the late 1960s.)

Brady's bill, the Centennial Monetary Commission, may go nowhere but his timing is impeccable considering all the angst over the Fed's easy-money policies. He's also playing up the fact that it's been 100 years since the Fed's creation, which makes it a nice time to assess how it's doing.

A fight over the president's pick for Fed chairman could give Republicans an opening to insist on this commission. Here's how one wily source put it: "Could the Millennium Commission bill become the Republican bottom line for confirming the next Fed chairman?"

To see more posts from Barb Rehm's Blog, click here.

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Comments (1)
There is still another kicker to the Fed Chairmanship succession. In the absence of the Vice-chairman the Board elects from its members a Chairman pro tempore who presides until a new chairman has been confirmed. This scenario played out in 1978 when Arthur Burn's term as chairman expired on January 31. President Carter nominated G. William Miller to be the next chairman but his confirmation was delayed by the opposition of Sen. William Proxmire, then Chairman of the Senate Banking Committee. Burns decided to remain on the Board while the Senate debated the Miller nomination. The then vice-chairman, Stephen Gardner would have presided as chairmen during the interim but he absented himself from Fed meetings, thereby allowing the Board to elect Burns as Chairman pro tempore. When Miller was eventually confirmed, Burns resigned from the Board and Gardner resumed his attendance.

A similar situation could prevail next year if the Senate delays the confirmation of the next Chairman. For example, if Yellen is the pick, she could decide to absent herself from Fed meetings so as not to seem to be assuming the reins of leadership prior to her confirmation. This would allow the Board to elect Bernanke (or any other member) as chairman pro tempore until a new chairman was confirmed.

There is one more kicker. The chairmanship of the Federal Open Market committee is elected by its members. By tradition, the FOMC elects the chairman of the Federal Reserve as its chairman but it is not bound to do so.

Ken McLean
Posted by Ken McLean | Monday, August 19 2013 at 2:36PM ET
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