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Understaffed Fed raises worries

With a retirement this summer, the central bank will have just four of seven board seats filled.

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Moreover, in his view, President Bush's most recent nominees to the board have poorer credentials than typical ones in the past.

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Five governors a minimum in some cases

But many analysts say it would be best to resolved the vacancies soon. For one thing, Congress's Federal Reserve Act calls for at least five governors to agree on certain Fed actions.

In mid-March, when the Fed faced its emergency decision to provide credit to Bear Stearns, one of the five sitting governors was unreachable on an airplane returning from Europe. An amendment to the law, passed after 9/11, enabled the board to act with unanimous agreement among its available members.

The board seats frequently turn over faster than the 14-year terms imply. One reason: Those who serve can earn more in the private sector than their $172,000 Fed salaries.

It has been a year since Mr. Bush announced the nomination of Elizabeth Duke and Larry Klane to the two board seats that are empty. Bush has also nominated Randall Kroszner, who recently completed a partial term, to serve a new 14-year term. Under a Federal Reserve Act provision, Mr. Kroszner has agreed to continue serving on the board even though his first term has ended and the Senate has not confirmed his new appointment.

The other four board members now are Chairman Ben Bernanke, Vice Chairman Donald Kohn, Kevin Warsh, and Frederic Mishkin, who announced recently that he will return to an academic job in August. Poole, now a scholar at the Cato Institute in Washington, says the vacancies are an urgent matter, because a failure to act now could extend the vacancies into next year.

Congress typically is on recess during August. Then, after fall elections, it often takes many months for a new president to make appointments and for the Senate to confirm nominees.

Poole says the White House and Senate should reach a compromise, perhaps each identifying two people acceptable to the other side. "In my experience … it's not a partisan job."

Central bankers pride themselves on political independence. But a holdup in nominations is not unprecedented – it happened under a Republican-controlled Senate in 1999.

The current banking turmoil means that the Fed's role as a bank regulator is growing in prominence. That's an area where politicians have disagreed about how vigorous the Fed should be.

"As the Fed becomes a stronger and more powerful regulatory body, it seems to me this becomes a political issue more than at any time that I can remember," says Brian Wesbury, chief economist at First Trust Advisors in Lisle, Ill.

Yet basic monetary policy – where less of a partisan divide exists – remains the Fed's paramount task, he says.

"It would be sad to see this [appointment process] become a political football," Mr. Wesbury says. "I'm afraid that the odds of that have gone up dramatically."