Federal Reserve

As Seats Go Unfilled, Fed Board Could Drop to Three Members

Binyamin Appelbaum

The Federal Reserve governor Jeremy C. Stein is the chairman of the internal committee that monitors financial markets for signs of trouble, and of the committee that watches the way that banks treat their customers.

He is also the only remaining member of those committees.

Mr. Stein has said that on May 28 he will step down from the Fed.

A string of departures from the Fed's seven-member board over the last year has left the central bank on the verge of operating with just three governors for the first time in its 100-year history. Three nominees are awaiting Senate confirmation, but so are scores of nominees to other offices, and Senate Democrats say there is a real chance no vote will be held before Mr. Stein departs at the end of this month.

Jeremy Stein, governor of the U.S. Federal Reserve.
Andrew Harrer | Bloomberg | Getty Images

The dwindling of the board is straining the Fed's ability to manage its complex responsibilities, which extend well beyond its enormous economic stimulus campaign and its lead role in the overhaul of financial regulation.

It is also shifting the balance of power on the Fed's most important group, known as the Federal Open Market Committee, which sets monetary policy. The March and April meetings of that committee — which includes both board members and presidents of the 12 regional reserve banks — represented just the third and fourth times in history that a majority of the votes were cast by the regional presidents, who are allocated five votes on the committee on a rotating basis.

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Unlike the members of the Fed's board, who are presidential appointees, those officials are selected by business leaders in each district, and they are not subject to Senate confirmation.

"Congress created an F.O.M.C. with a majority of presidential appointees on it and it would be unfortunate not to continue that and to honor that," said Donald L. Kohn, the Fed's vice chairman from 2006 to 2010, and now a scholar at the Brookings Institution. "It seems to me consistent with democratic accountability."

U.S. Federal Reserve Governors Jeremy Stein, left, and Jerome Powell, listen during an open meeting of the Federal Reserve Board in Washington, D.C.
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The Fed's predicament is particularly striking because there is no real opposition to the two nominees, who were put forward by President Obama in January. Stanley Fischer, a former head of the Bank of Israel who would become the Fed's vice chairman, and Lael Brainard, a former Treasury official, advanced through the Senate Banking Committee by a voice vote. Jerome H. Powell, a member of the Fed's board, is also awaiting Senate confirmation to a new term.

Amy Brundage, a White House spokeswoman, said the administration was "hopeful that the Senate will confirm the three pending nominees without delay."

The depletion of the Fed's board is a relatively new phenomenon.

President Franklin D. Roosevelt nominated six men to the newly created Federal Reserve Board on a Monday morning in January 1936. The Senate confirmed all six on Thursday, just four days later, and they took office on Saturday.

For the next half-century, the Fed was rarely short-handed. Replacements for departing governors were named and confirmed with little fuss.

Over the last two decades, however, the Fed has had a full complement of governors less than 40 percent of the time. Since the beginning of the financial crisis, the Fed has operated primarily with just five governors.

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Partisan divisions have made it harder to push all manner of presidential nominees through the Senate, and appointments to the Fed in particular have generated more political heat in the aftermath of the crisis.

Since March, the Fed has operated with four governors for just the third stretch in its history.

The confirmations of Mr. Fischer and Ms. Brainard would return the board to five. The White House has yet to nominate people to the other two seats.

Randall S. Kroszner, who served on the Fed's board from 2006 to 2009, was one of five governors during most of that time, a situation he described as difficult but manageable, even during the heart of the financial crisis. He cautioned, however, that anything less than that would be difficult.

"When you get down to four or fewer, it's difficult to get the work done," said Mr. Kroszner, an economics professor at the University of Chicago. "There's an enormous amount going on — on the regulatory side, monitoring the markets, the impact of Q.E. and the tapering — and it takes a lot of time and focus," referring to quantitative easing, or the Fed's bond-buying program.

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Frederic Mishkin, a board member from 2006 to 2008, said the absence of a vice chairman was particularly problematic for the Fed's chairwoman, Janet L. Yellen, because some tasks could not be delegated to other board members.

"The chair has to have time to think about what's going on," said Mr. Mishkin, a professor of economics at Columbia University. "There's a lot of administrative stuff that either the chair or the vice chair needs to be in charge of and if there's no vice chair, that means the chair is going to have less time to figure out the best policy, and that can be very costly."

The board manages its affairs through six committees. In normal times each of the governors leads one committee and sits on some others. Ms. Yellen does not sit on the committees.

With only five board members, most of the committees were reduced to just two members. Mr. Kohn recalled that he and Kevin Warsh made up the membership of both the board's operating committee and the committee that oversaw the regional reserve banks. Mr. Kohn led one committee, Mr. Warsh the other, and they took turns sitting at the head of the table.

Now that the Fed has only four board members, most of the committees are solo affairs. Only the committee that oversees bank supervision, headed by Daniel K. Tarullo, has a full complement of all three of the available governors.

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Mr. Stein and Mr. Powell (his term has actually expired but he is allowed to continue to serve pending the vote) each run two solo committees, an arrangement the Fed has maintained in the hope of imminent reinforcement.

But if the board is reduced to three governors, the challenges would extend beyond asking Mr. Powell to be chairman of four committees. The remaining governors would be barred from speaking about policy issues except at formal meetings because any such conversation would involve a majority of the board.

"Three would be extraordinarily difficult," Mr. Kohn said. It "would really constrain the ability to have interchanges in the way that normal human beings would."

The Fed faces few major decisions in the next few months. It is in the process of gradually ending its purchases of Treasury and mortgage-backed securities, and it is still some time away from a decision to start raising interest rates. But Ms. Yellen has emphasized the Fed's responsibility to reduce unemployment more strongly than many of her Fed colleagues.

Any restrictions on her ability to meet with her fellow board members could particularly constrain Ms. Yellen's ability to build support for her views. Her predecessor, Ben S. Bernanke, won support for his policies during the financial crisis through constant consultation with his board members, sharing with them his academic expertise in the workings of financial crises.

—By Binyamin Appelbaum of The New York Times