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Who's Driving Fed Policy? Most Voting Seats Are Empty

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(Bloomberg View) — In recent years, the Federal Reserve has tried to increase transparency in its communications with the public. Officials have added press conferences to their meetings four times a year, published a summary of economic projections for the years ahead, and publish “dot plots,” which are forecasts for the federal funds target rate made by all members of the Federal Open Market Committee.

Despite all this disclosure, there’s one uncertainty surrounding the Fed that it can’t communicate its way out of: its membership. Of the 12 positions eligible to vote in FOMC meetings in 2018, as few as five members are in their seats today. How much can the public know about the institution’s thinking, when the makeup of the institution itself is mostly unknown?

— (Related on ThinkAdvisor: Bond Traders Are No Fools, Dismissing Bluster of Four Rate Hikes)

First, of course, blame Senate gridlock. Seven of the 12 voting members of the FOMC are the members of the Board of Governors, who are nominated by the president of the U.S. and confirmed by the Senate. Yet the Senate hasn’t confirmed any members of the board since June 2014, when Lael Brainard was confirmed and Jerome Powell was re-appointed. President Obama made nominations to fill the two vacancies that existed late in his second term, but like that of Merrick Garland to the Supreme Court, those nominations died in the Senate.

Another vacancy was created this week when Daniel Tarullo formally stepped down after announcing he would do so earlier this year. The Board of Governors now has only four of its seven members in place, and President Donald Trump has yet to make any nominations.

The remaining five voting members of the FOMC are presidents of regional Fed banks, but in an unusual circumstance, two of those five voting members are not yet in their positions. The first is the incoming president of the Atlanta Fed, Raphael Bostic, who takes his post in June. Although he was an economist for the Fed from 1995 to 2001, his main research focus is on housing and urban development. He has given no speeches on monetary policy, and we have no idea what he thinks about the current state of affairs. The second unknown 2018 voter is the president of the Richmond Fed, which now is vacant following the surprise resignation by Jeffrey Lacker this week.

Perhaps more concerning than the five aforementioned vacancies are the unknown statuses for both Fed Chair Janet Yellen and the vice chair of the Board of Governors, Stanley Fischer. Yellen’s term as chair expires in February, and Fischer’s term as vice chair expires next June. It’s possible that both could be reappointed to their current positions, or that President Trump could appoint others as their replacements — at which point perhaps the Senate would struggle with their confirmations as well. The terms as members of the Board of Governors, which are distinct from their terms as chair and vice chair, last beyond 2018, so it’s possible that they could stay on the board even if a new chair and vice chair are named. But if they were to leave, which would be unsurprising, that would create another two vacancies.

Most concerning of all, this is not a tranquil time for the Fed; we cannot expect a smooth transition. As the release of the March Fed minutes this week indicated, the Fed is currently weighing whether and how fast to increase interest rates, and whether and how fast to shrink its balance sheet. Those questions will only become more pressing in 2018. We can’t presume that new members will think, speak and vote like old members, as the newest regional Fed president and 2017 FOMC voting member, Neel Kashkari, has become arguably the body’s most dovish, casting the lone dissenting vote in March against a rate hike.

The role of the Fed’s vice chair of supervision, created by the Dodd-Frank Act of 2010, remains unfilled. And there remains uncertainty about what, if anything, Republicans will do to Dodd-Frank now that they control Congress and the White House. A short-handed Fed makes the institution less able to do its work on these matters.

The Fed has a lot of decisions to make over the next year or two, and at the moment it’s woefully understaffed given vacancies and looming term expirations. How much can we rely on the Fed’s communications if we don’t even know who will be voting next year?

— Read The New Shape of US Household Debt on ThinkAdvisor.


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