On Monday I had the opportunity to attend the ceremonial swearing-in of two new members of the Federal Reserve Board, economist Jeremy C. Stein and banker Jerome Powell.
In his remarks, Fed Chairman Ben Bernanke noted that this is the first time during his chairmanship that the seven member board has been at full strength. This may have important implications for the future course of monetary policy.
As FT readers will no doubt know, the key policymaking arm of the Federal Reserve is the Federal Open Market Committee, a 12-member group that consists of the 7 board members plus five of the 12 regional Federal Reserve bank presidents.
The regional banks are based in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. Their geographical location remains based on the distribution of population and economic power in 1913, when the Federal Reserve System was established, rather than that of today.
The president of the Federal Reserve Bank of New York is a permanent member of the FOMC. The remaining 11 bank presidents rotate annually. At present, the presidents from Richmond, Atlanta, Cleveland, and San Francisco are voting members of the FOMC. However, at FOMC meetings all of the regional bank presidents participate and share their views.
Unlike members of the Federal Reserve Board, who are nominated by the president and confirmed by the US Senate, regional bank presidents are appointed by private boards of directors for each bank. These board members tend to be important local bankers and business people in the community in which the bank is located.
Consequently, regional bank presidents tend to be somewhat provincial and more concerned with representing the views of their well-to-do board members than the general public. Therefore, they tend to be much more concerned with keeping inflation down than bringing down unemployment, even though the Fed is required by law to take both into account when setting policy.
Obviously, the chairman of the Fed exercises his greatest influence over his fellow board members because he sees and confers with them on a daily basis. And since he knows who appointed each member, he has a good idea of where they are coming from, politically, and how best to cajole them into doing what he would like. By contrast, the chairman has no real authority over the regional banks and sees their presidents only every six weeks at FOMC meetings.
It is extremely important for the chairman to have absolute confidence of the support of the seven board members going into FOMC meetings if he wishes to move policy in a new direction. It is almost a certainty that he will get resistance from the regional bank presidents regardless of what he proposes. But if they are convinced that the board members stand in unison, the bank presidents are less likely to make waves since they know the chairman has the votes to win.
It is my belief that the Federal Reserve Board vacancies of the last 6 years are a key reason why the FOMC has been so reluctant to act in the face of declining inflation, sluggish growth, and high unemployment. Now that the board is finally at full strength, the stage may be set for the long-awaited move by the FOMC toward aggressive monetary easing, perhaps through unconventional channels.
What Do We Know About The New Fed Board Members’ Views on Monetary Policy? – Matthew Yglesias