Just when the economy most needs the help of capable policymakers, America's central bank finds itself short-staffed.
The predicament: Where the Federal Reserve is supposed to have seven members on its board of governors, it now has five. A recently announced retirement, moreover, means that by late summer the number is set to drop to four.
Compared with things like the price of oil or subprime mortgages, this doesn't qualify as a crisis. But the Fed is the first line of defense against such threats – inflation and the financial fallout of house-price deflation.
The case of the missing governors may be larger than just the board's ability to perform its tasks at an important time. Since it stems from Senate inaction on nominees, it is possible that political tensions surrounding the central bank are growing.
"The logical thing to do is to fill these positions," says William Poole, former president of the Federal Reserve Bank of St. Louis. "It should not wait…. You could end up in a critical situation, where you ended up through resignation or illness with a board that only had two or three people."
Fed-watchers and people such as Mr. Poole, who have sat on the Fed's policymaking committee, say a fully staffed board serves two vital functions: It adds to the range of professional opinion around the Fed's voting table and it helps ensure that the board doesn't fall behind on administrative and regulatory duties.
"We need as much horsepower as we can get" on the board, says Kenneth Thomas, a Fed expert at the University of Pennsylvania's Wharton School. "This is taking a V-8 [engine] down to a V-6 and maybe even a V-4."
Are politics behind Fed vacancies?
The Fed's challenge reflects a confluence of politics and a weak economy. The coming presidential election may have inclined the Democratic-controlled Senate toward postponing action, in the hope that more slots will be filled by a president of their own party. America's economic woes make the Fed's job arguably more important and less clear-cut than it has been in years.
Inflation is front page news. The housing-induced slump has raised questions of whether the Fed should pay more heed to the price of assets, especially real estate, as it sets interest-rate policy. Turmoil at banks has prompted the Fed to take a string of unusual actions to stabilize financial markets – culminating in a controversial intervention and loan to prevent bankruptcy at investment firm Bear Stearns.
Some key players in the Senate, moreover, say the Fed needs to be more vigilant in its role as a bank supervisor and regulator. As they see it, weak oversight of bank-lending practices helped fuel a home-price boom and bust.
"It isn't just putting bodies there" on the Fed's board, Sen. Christopher Dodd, chairman of the Senate Banking Committee, said on the CNBC network recently. "The Fed didn't do its job, in my view, [on subprime lending]. So I'm not going to sit back and allow for 14-year appointments of people who don't seem to understand how important it is the Fed do its job."
Some outside analysts agree the Senate should not merely rubber stamp all nominations. "It's always healthier to have robust open and public debate," on central banking just like anything else, says Tom Schlesinger, head of the Financial Markets Center in Howardsville, Va., a provider of research on the Fed.
Moreover, in his view, President Bush's most recent nominees to the board have poorer credentials than typical ones in the past.
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."