The Federal Reserve Board is the most powerful economic institution in the world.
And given that power, it was designed so that any single president wouldn’t have too much influence over it. Fed governors have staggered 14-year terms, which means that a president should only be able to appoint a new member to the board every two years.
That design is busted.
President Trump could appoint five people to the seven-member Supreme Court of money in his first year. That's not counting his nomination of Jerome Powell, who was already sitting on the board as a governor, as chairman. He is to replace Janet L. Yellen, who gives her final news conference on Wednesday.
No president has had such immediate power to shape the Fed since the central bank’s modern era began under Franklin D. Roosevelt, giving Trump — if he were to seize on it — an unusual ability to shape the nation’s economic policy.
Fed governors handle many of the administrative and regulatory tasks needed for the U.S. financial system to function, but they are best known for making up the voting majority of the Federal Open Market Committee. The FOMC votes on monetary policy such as the interest-rate target or asset purchases. In short, they decide when to turn on and off the Fed’s metaphorical printing presses, decisions that can have dramatic impacts on the economy.
Governors are appointed to 14-year terms intended to keep them out of sync with the political cycle and prevent the president from packing the Fed. But because of high turnover and vacant seats, that’s not happening.
Yellen's term as chair ends on Feb. 3, but the exact timing of her departure is unclear, as she has promised to leave as soon as Powell is sworn in. Powell has been approved by the Senate Banking Committee, but hasn't been confirmed by the full Senate.
At the end of his first year, if Powell is sworn in before then, Trump will have the chair of his choice (Powell, who was nominated by Barack Obama), his pick for vice chair of supervision (Randal Quarles), another nominee in training (economics professor Marvin Goodfriend), and three more open seats to fill. The only member of the board without a Trump stamp will be Lael Brainard, an Obama appointee who joined in 2014.
Governors don’t directly do a president’s monetary bidding (despite what Richard Nixon might have tried) or serve at his or her pleasure, but a president can shape Fed actions by appointing a board that shares his opinions.
Over the course of history, a few, mostly recent, presidents have ended up with a full board of their choosing — but it only came late in their term. Depending on Brainard’s future, and with the caveat that Powell was originally a Democratic appointee (with a Republican background), Trump’s moment could come much sooner.
We’re already seeing the fallout.
Based on Trump’s early picks, it appears the administration is reversing the Fed’s longtime shift toward governors who are academic economists and away from bankers and businessmen, said Gary Richardson, a Fed historian at the University of California at Irvine.
It starts at the top. While Powell seems to agree with current Fed chair Yellen on the general course of monetary policy — slowly withdrawing the massive stimulus the Fed has injected since the Great Recession and gradually raising interest rates — Powell’s background is as a lawyer and investment banker.
“It’s not just Powell,” Richardson said. “The leading economists have left the board of governors and it doesn’t look like the Republicans have any intention of putting economists on the board, at least not in leadership roles.”
Richardson is concerned that a move away from research economists would deprive the Fed of the expertise required to engineer the more sophisticated policy ammunition that might be needed to fight the next recession. And it could also threaten the Fed’s relationship with the public.
The Fed has become more open under Alan Greenspan, Bernanke and Yellen, from releasing more of its materials more quickly to holding news conferences, Richardson said, but “switching to bankers and lawyers on the board could move back some of this transparency and make the Federal Reserve a less-effective institution.”
And if the Fed became less transparent, it would lose a key guarantor of its independence: the knowledge within the body that, in time, all its deliberations (and any political shenanigans that might have gone on along with them) will be made public.
How did Trump get this opportunity?
The system makes it challenging to recruit, confirm and retain candidates, and recent trends in politics and economics are making it worse.
The present Fed-vacancy crisis has roots in escalating bad blood over Fed appointments going back to the second Bush administration, said Peter Conti-Brown, professor at the University of Pennsylvania's Wharton School.
It peaked in Obama’s second term as the GOP-controlled Senate made it difficult for his candidates to be confirmed. Until the Obama administration, the Fed had never had more than two vacancies at a time. During Obama’s time, nomination delays and partisan gridlock led to two different, brief periods in which three seats were vacant. Now, there have been three vacancies for most of Trump’s term.
Trump and the Republican Senate should be able to nominate and confirm candidates in a timely manner since the filibuster no longer applies.
But the delays continue. Conti-Brown said it’s likely because these nominations, unlike those for the Supreme Court, just aren’t a priority for either the president or the public.Trump has been slower than Obama and other recent presidents to nominate candidates for federal jobs across the board, and the Senate has been almost equally slow in confirming them, according to the Partnership for Public Service. That slow nomination pace has extended to Fed seats, even though the Senate has so far proved willing to confirm those they’ve been sent.
It's unclear that Trump will make the most of his unprecedented chance to pack the Fed. The pace of his nominations and lack of focus on the issue suggest it’s not a top priority for him.
Instead, the real-estate industry veteran has been whipsawed between his impulse toward easy money and low rates to stimulate the economy, and conservative orthodoxy. He signaled the former by picking Powell, who is likely to continue Yellen’s cautious path, and the latter by nominating Goodfriend and considering nominating economist John Taylor, who until recently had a much more hawkish view.
A broken system
It’s not just political shenanigans that are standing in the way of the Fed working like it was supposed to.
Other issues include pay, workload and academic tenure rules at top universities.
“Being a governor, most people say, isn’t a very good job,” Richardson said. “Anyone who is able to be a governor of the Federal Reserve is eligible for a lot of better jobs that pay a lot more.”
In 2017, governors earned $179,700 (the chair earned $199,700). That’s less than half of what most presidents of the nation’s 12 regional federal reserve banks earn, and an even smaller fraction of what governors could earn at a top bank, law firm or university, when you take into account books, speaking and other outside gigs. It makes it tempting to serve a couple years and then “cash in,” Richardson said, especially since the work itself isn’t particularly glamorous.
The chair and, to a lesser extent the vice chair, have some of the most prominent jobs in the global economy, but the rest of the board can be forced to focus on less exciting topics like the weeds of banking regulation and payment processing.
Fixes for the future
A pay raise would be an obvious first step toward retaining governors longer, Richardson said. Conti-Brown suggested governors’ quality of life could further be improved with a dedicated staff instead of the current system of a shared staff pool and ad-hoc staffing.
Conti-Brown also suggested that candidates from academia be required to declare whether they’d give up their tenure upon nomination — tenured professors often won’t stay on the board more than two years since universities require them to return. An oft-cited example is Harvard professor Jeremy Stein, who joined the Fed on May 30, 2012, and left office May 28, 2014 to return to teaching.
He also endorsed shorter 10-year terms “because 14 years feels impossibly long, so they resign much earlier.”