Member's Early Departure Adds to Fed Turnover

Edward M. Gramlich is the lone non-Bush appointee on the Board of Governors.
Edward M. Gramlich is the lone non-Bush appointee on the Board of Governors. (By Ken Cedeno -- Bloomberg News)
By Nell Henderson
Washington Post Staff Writer
Thursday, May 19, 2005

Federal Reserve Board member Edward M. Gramlich said yesterday he will leave the central bank in late summer, giving President Bush two openings to fill on the powerful panel this year just months before he is to name a new chairman.

Gramlich, 65, a self-described "liberal Democrat," is the only member of the seven-member Fed Board of Governors who was not appointed or reappointed by Bush since he first took office in 2001.

An economist appointed to the Fed by President Bill Clinton in 1997, Gramlich is leaving "to pursue several teaching and research interests," the Fed said in a news release. He will become a professor at the University of Michigan's Gerald R. Ford School of Public Policy and will hold a part-time appointment as a senior fellow at the Urban Institute. His board term expires Jan. 31, 2008.

Gramlich's resignation, effective Aug. 31, comes at a time of great transition at the central bank.

Fed Chairman Alan Greenspan, who has dominated central bank policymaking for much of his 17-year tenure, has indicated he plans to step down when his board term expires Jan. 31, although the White House may encourage him to stay on a bit longer.

Fed board member Ben S. Bernanke, former head of Princeton University's economics department, is expected to leave the central bank as soon as he is confirmed as Bush's new chairman of the president's Council of Economic Advisers. A Senate Banking Committee confirmation hearing scheduled for today has been postponed.

Four of the 12 regional Fed bank presidents have started their jobs within the past two years. The bank presidents and board members serve together on the 19-member Federal Open Market Committee, the Fed's top policymaking group, which decides how to adjust the short-term interest rates that influence consumer and business borrowing costs throughout the economy.

All these changes are occurring as the FOMC debates several important policy issues, including how far and how quickly to raise interest rates this year, how to communicate its thinking with the public and whether to establish an official numerical target for inflation.

The current degree of turnover among officials is "large, but it's happened before," particularly in the economically turbulent 1970s, said Allan H. Meltzer, author of "The History of the Federal Reserve."

After naming Gramlich's replacement, Bush will have appointed or reappointed the entire board, making him the first president to do so since Ronald Reagan, said Meltzer, a professor at Carnegie Mellon University's Tepper School of Business.

Bush's Fed picks have been highly regarded in financial markets. He is not seen as having tried to put any partisan or philosophical stamp on the Fed. In some ways, Bush's appointees have not differed much from Clinton's on monetary policy, the Fed's adjustment of interest rates to influence the availability of money and credit.

While board members in recent years have differed at times on what to do, they have generally agreed on the goal of keeping inflation low, believing that stable prices promote economic growth and employment. That consensus contrasts with the disagreements of decades ago, when many Democrats and some Republicans were willing to tolerate higher inflation in hopes of lowering unemployment.

"There's more consensus . . . within the economics profession about how the world works than there was in the 1950s, '60s and '70s," Meltzer said.

There is, however, a continuing partisan divide over financial regulation, he said. For example, both the Republican Greenspan and his Democratic predecessor, Paul A. Volcker, were inflation-fighters, but Greenspan abhors government intervention in financial markets, while Volcker was more pro-regulation.

With interest rates generally so low, there is no sign that financial markets are worried that the turnover among Fed governors and presidents portends any instability in monetary policy -- as long as Greenspan remains, analysts said.

"We've had members [of the Fed's top policymaking committee] come and go, but it's really been Greenspan's committee. And he has secured persistent, stable, low inflation," said Mickey Levy, chief economist of Bank of America.

Levy predicted Greenspan's eventual successor will share the same goal of low inflation. But some investors will likely grow nervous as Greenspan's departure nears, other analysts said.

"There will be some uncertainty in the markets building up at the end of the year," said Stuart Hoffman, chief economist at PNC Financial Services and a former Fed economist. "There will be some jitters."

There was similar nervousness in the early months of 1987, as investors, analysts and other market participants realized that Volcker's term as chairman would expire in August, Hoffman recalled. It was unknown early in the year whether Volcker wanted a third term or if President Reagan wanted him to stay. Volcker had been chairman since August 1979, and was credited with leading the Fed drive that ended double-digit inflation.

"There was talk in the markets" about whether Volcker would leave, and some apprehension at the thought that "this guy, who since '79 had guided them through a lot of turmoil, would be leaving and someone new would be coming in," Hoffman said.

Within the Fed, as in any workplace, the prospect of a new boss has fueled some muted speculation about possible staff changes as well, according to analysts and former Fed employees. In particular, some top Fed economists may consider leaving for jobs in business or academia, depending on who succeeds Greenspan, creating opportunities for others to move up in the hierarchy.

"Will there be some turnover? Of course," Hoffman said.

Bush administration officials, meanwhile, have indicated they are unlikely to name a successor this year.

"We're still in the first or second innings of the ballgame of replacing Greenspan," Hoffman said. "But it's not like the game hasn't begun."

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