The Federal Reserve announced Thursday that economist Jeremy Stein is resigning from the central bank’s board of governors after a two-year stint that established him as a leading voice on the unintended consequences of the Fed’s easy-money policies.
Stein will step down May 28 to return to teaching at Harvard University. He has been on leave from the college since joining the Fed in 2012. He also previously served in the Obama administration as a senior adviser to the Treasury Secretary and on the staff of the National Economic Council.
Stein arrived at the central bank shortly before it launched a new effort to jump-start the recovery by pumping money into the economy. It has bought more than a trillion dollars in bonds to push down long-term interest rates and has pledged to keep interest rates low for years to come.
Though Stein never dissented from the Fed’s decisions, he was a leading proponent of the argument that years of rock-bottom interest rates were causing investors to “reach for yield” through increasingly risky assets that had the potential to destabilize the financial system. He also said the Fed should consider raising interest rates to combat such excesses — a highly controversial proposal that has become a flash point within the central bank.
“There is a cost associated with pushing risk premiums too low, because doing so increases the likelihood that they may revert back in a way that hinders the Federal Reserve’s ability to achieve its mandated objectives,” Stein said in a speech last month.
The central bank’s most recent policy statement included an oblique reference to those concerns. It said the Fed will consider “financial developments” along with the health of the labor market and inflation in determining when and how to raise interest rates.
“This question of what the new world of central banking will look like and where financial stability fits in is certainly on everybody’s minds,” said Anil Kashyap, an economics professor at the University of Chicago who has coauthored papers with Stein. “I think he did the institution a real service by being a voice inside the discussion trying to push people to be thoughtful about that.”
Stein’s departure could leave the central bank short-handed in the midst of the delicate task of scaling back its support for the economy. The Fed has undergone unusual turnover in recent months, and the seven-member board of governors could dwindle to just three for the first time since 1936: Chair Janet Yellen, Gov. Daniel Tarullo and Gov. Jay Powell, whose term technically expired in January but who is allowed to serve while awaiting Senate approval of his reappointment.
The White House has nominated former Treasury official Lael Brainard and Stanley Fischer, former head of the Bank of Israel, to fill two of the vacancies. An aide to the Senate Banking Committee said a vote on their confirmation, along with Powell’s, is likely be held in the coming weeks.
But the nominations will not reach the Senate floor for final action until after Easter, when the prospective Fed governors will join a backlog of more than 140 pending appointments, a Democratic leadership aide said.
The White House did not respond to questions about when it would fill the two remaining vacancies.