Silent political issue: nominations to the Fed board

Next president will appoint five of seven Fed governors, shaping America's finances.

Ask almost any American what key positions the new president will appoint, and the answer will likely be his Cabinet and vacancies on the Supreme Court.

They are missing a third category that could have a great impact on their lives: top Federal Reserve policymakers.

The new White House occupant will end up naming at least five of seven Fed governors to 14-year terms - and possibly pick a successor to Alan Greenspan as Fed chairman. Just as White House appointments influence the nation's judicial climate, the president's Fed nominations will help set the pace and tone of the economy, affecting everything from mortgage rates to the way banks do business.

Both Al Gore and George W. Bush have hinted they would reappoint Mr. Greenspan, should he wish to stay in his job when his current four-year term expires in 2004. But they've said nothing specific about the other appointments, officials who would have - at least legally - equal voting rights on policy as the chairman.

Some think the silence is appropriate. "Voters ought to be indifferent with regard to Fed policy and the composition of the Fed board, including the chairman," says Andrew Brimmer, a Fed governor from 1966 to 1974 and now a Washington consultant.

Economist Tom Schlesinger disagrees. "No actions a president takes will have a bigger impact on citizens' economic well-being than the appointments he makes to the central bank's leadership and the way he tailors his relationship with the Fed," says the executive director of the Financial Markets Center, a nonprofit research group in Philomont, Va.

Most economists regard a wise monetary policy as crucial to the prosperity of the nation.

To some degree, the Fed controls the interest rates that Americans pay on their loans. It manages growth in the nation's money supply - the cash and credit that fuel an increasing output of goods and services. It strives to avoid high inflation.

Pilot of the economy

These days, Fed monetary policy usually has more influence on the business cycle than what the White House or Congress does. That's because they often don't agree on the direction of taxation and government spending.

A new book by Bob Woodward of Watergate fame tells how President Reagan, through his Chief of Staff James Baker III, pressured then Fed Chairman Paul Volcker directly and through appointments of Fed governors to lower interest rates. President Bush also pressured Greenspan to lower rates.

In this year's campaign, both Bush and Gore professed they would keep their political hands off monetary policymaking by the Fed, an independent agency.

Neither commented on current monetary policy. Nor did they specify the qualifications they will seek in new governors, other than generalizations about quality people and diversity.

Mr. Schlesinger figures voters should have been given a clue by the candidates on what sort of Fed officials they would appoint - their philosophies, their economic goals.

"The poor voting public doesn't have any idea" what the new president will do on Fed appointments or on international financial policy, he says.

One reason for the silence on monetary policy is that it's as complex as the physics of a Florida ballot. "It's a bit too esoteric for the public to understand," says Lyle Gramley, chief economist of the Mortgage Bankers Association and a Fed governor in the early 1980s.

Another could be the political risk of candidates making comments on monetary policy as too tight or too loose, opening themselves up to criticism as being too "inflationist" or shutting off prosperity. As a result, Fed policy virtually never becomes an issue.

"There is no tradition of this," says Allan Meltzer, an economist at Carnegie-Mellon University in Pittsburgh. "It would be strange if the candidates decided to do so."

At the moment, two seats sit vacant on the Board of Governors. Sen. Phil Gramm (R) of Texas, the chairman of the Senate Banking Committee, which has jurisdiction over Fed nominations, has blocked President Clinton from filling the slots.

He says the new president should have that opportunity. Fed governors have 14-year terms, a length intended to give them freedom from political influence.

Also, the board term of the vice chairman, Roger Ferguson Jr., expired in January. Mr. Gramm has held up his renomination. But he can remain on the job until someone is confirmed by the Senate. Two other vacancies will open up by early 2004.

Fed monetary policy is set by the seven governors and five of the 12 presidents of regional Fed branches. Four of the presidents serve on a rotational basis.

According to research by the Financial Markets Center, all five Fed governors (including Greenspan) are multi-millionaires. "Even though they preside over an economy with soaring household debt levels, none of the governors reported a penny in liabilities in 1999," the Center found.

Just who should sit here?

Schlesinger would prefer a more diverse board, with some members understanding better the views of labor, agriculture, and consumers, though not necessarily being direct representatives of these groups.

Mr. Meltzer, however, cheers the increasing professionalism of central bankers in recent years, both in the US and abroad. Most central bankers are now economists. They are able to better understand monetary policy issues.

Should Greenspan leave, speculation on a successor falls on Robert Rubin, former secretary of the Treasury, or New York Fed president William McDonough, should Gore become president, and Harvard University's Martin Feldstein or economic adviser Lawrence Lindsey, should Bush win the top job.

The ideology of the governors can be especially important in dealing with regulatory matters. The Board of Governors, for instance, deals with enforcement of rules requiring banks to put loan money into poor and minority communities. It must deal with the terms of the host of bank mergers taking place nowadays.

(c) Copyright 2000. The Christian Science Publishing Society

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