For occupants of the White House, filling open slots on the Federal Reserve’s Board of Governors used to be little more than an afterthought – if they even remembered to do it at all. The Obama administration let the Fed languish with two unfilled board seats for its entire first term. Things changed under the Trump administration, a time when Donald Trump broke with tradition and openly criticized the central bank for policies that he believed undermined him.
In response, Trump attempted to stack the Fed with radical candidates to carry out his agenda but really had no business being anywhere near the central bank, including one who advocated putting the US economy back on the gold standard. Rejected by Congress, lawmakers were suddenly on high alert for candidates who were nominated more for their political views than their views on the Fed’s dual mandate of full employment and stable prices. The Biden administration found this out after nominating Sarah Bloom Raskin, who had formerly served on the Fed’s Board of Governors. Raskin’s nomination tanked last year because of her advocacy for policies seen to be harmful to the fossil fuel industry.
This begs the question: What would it take to get a nomination confirmed in an era of deep partisan divides in Washington? It’s something the Biden administration is likely wrestling with as it seeks to replace Fed Vice Chair Lael Brainard, who moved on to become President Joe Biden’s top economic adviser last week. The White House has a strong interest in replacing Brainard with someone who, like her, believes in the administration’s anti-inflation agenda but also advocates for slowing the pace of rate hikes to see how the economy reacts to the tightening that has already taken place.
But that’s just the half of it. The seven members of the Board of Governors are nominated by the President and confirmed by the Senate. The top contenders to replace Brainard are Harvard University professor Karen Dynan and Northwestern University professor Janice Eberly, according to Bloomberg News. To be confirmed, the ideal candidate would first likely need to be a woman, as Brainard’s departure leaves Lisa Cook and Michelle Bowman as the only women on the board. Second, the ideal candidate would likely lean relatively dovish when it comes to monetary policy at a time when inflation is raging. The third requirement would be a strong commitment to such progressive causes as reducing racial inequality and climate change, but without a track record of public positions that seen as openly hostile to any industry group.
Barack Obama inherited three open seats on the Fed from the George W. Bush administration, filling one shortly after inauguration but then leaving the other two unfilled for the rest of his first term. To be sure, one of Obama’s early nominations, Nobel laureate Jared Diamond, was blocked by Richard Shelby, a Republican Senator from Alabama, a rejection that Shelby admitted was done out of spite. Obama could have nominated a more politically centrist candidate, but never did even as then Fed Chair Ben S. Bernanke struggled to build consensus among central bank officials for a more aggressive approach in putting the economy back on a path toward maximum employment.
Partially in recognition of that missed opportunity, every administration since -- including Obama’s second -- made it priority to fill the Fed with officials who support its agenda. As the Fed slowly raised interest rates throughout the first two years of his administration, Trump came increasingly to believe that he was being deliberately undermined. In early 2019, Trump said he planned to nominate political commentator Stephen Moore and former presidential candidate Herman Cain to the Fed’s Board of Governors. Neither had experience in academia or finance, but both were known as flamboyant conservative personalities. Even Republican Senators expressed unease at their nomination, and both eventually withdrew from consideration. Those episodes didn’t sway Trump from nominating Judy Shelton to the board later in 2019.
Unlike Moore or Cain, Shelton was an academic but was criticized for past work that was seen as largely advancing a return to the gold standard. Shelton attempted to clarify her position but her expressed support for Trump’s agenda, which would have called for lower interest rates at a time when the economy was picking up steam, sealed her fate. Even though her nomination was blocked in the Senate, it established the precedent that an otherwise qualified nominee could be blocked on the basis of his or her ideological positions.
That precedent would haunt the Biden administration when it nominated Raskin to be Fed vice chair for supervision in 2022. She was an advocate for increasing the Fed’s role in battling climate change, a stance that generated opposition from Republican Senators and West Virginia Democrat Joe Manchin.
Her failed nomination underscored the challenges Biden faces relative to his predecessors due to increased pressure by players outside the White House. For example, each year the Fed hosts a summer conference in Jackson Hole, Wyoming, where central bankers and staff economists present papers. In 2015, the Fed Up Campaign hosted an alternative conference at same location to protest the lack of diversity among Fed officials. The Campaign’s thesis was that minority groups suffered the most from a poor labor market and so the lack of diversity at the Fed systematically biased its policy toward tighter monetary policy. The Fed took the criticism to heart, launching a multiyear diversity and inclusion plan in 2016.
Eventually, the Fed included racial inequality as an official factor in determining the course of monetary policy. The Fed Up Campaign’s success was not lost on other left-of-center activists. Climate change activists began to put pressure on the Fed to explicitly consider the environmental effects of its policies. The Trump administration pushed back against the progressive tilt, opting for traditional appointees such as private equity investor Randy Quarles and Columbia University professor Richard Clarida.
The overtly ideological nature of contemporary Fed nominations set against the hyper-politicization in Washington means that it’s virtually impossible for the President to satisfy everyone within his party and also garner Republican support. As a result, Dynan and Eberly, despite their impressive resumes, will face a political gauntlet for which no amount of academic or research experience may help.
More From Bloomberg Opinion:
• Fed’s Credibility Can’t Take a Soft Landing: Allison Schrager
• Money Doesn’t Make America’s Economy Go Around: Bill Dudley
• Fed is Not the Right Place to Fight Climate Change: Karl Smith
(Adds that Michelle Bowman as also a board member in the fourth paragraph.)
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Karl W. Smith is a Bloomberg Opinion columnist. Previously, he was vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina.
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