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The Federal Reserve is short-handed, and that could be dangerous to the economy.
The Fed is the nation’s central bank, charged with managing monetary policy to ensure low inflation and low unemployment. The Fed is also part of the patchwork of agencies tasked with ensuring the safety and soundness of the nation’s financial system. The Fed is run by a Board comprising a Chairman, a Vice-Chairman, and five members, though currently three seats are empty with a fourth opening up May 28. President Obama’s nominees for the three open seats are pending in the Senate awaiting confirmation.
Senator Rand Paul is blocking these nominations as leverage to advance his demands to audit certain Fed actions in 2009 and 2010 relating to home loan reviews. Blocking nominations is standard senatorial fare, whether to the Fed or to any other governmental post to which the Senate has chosen to extend its constitutional “advise and consent” responsibility. Senator Paul is certainly treading a well-worn path, and while the “advise and consent” hurdle is applied far too widely, in the case of Federal Reserve Board seats Senate confirmation is entirely appropriate. However, the Federal Reserve needs those positions filled now with suitable individuals. Senator Paul should make his point, and then allow the Senate to work its will.
The Fed has a new Chair as Janet Yellen replaced Ben Bernanke after eight years at the helm. Despite her prior experience as Fed Vice-Chair and as a regional Fed President, as have many before her she has struggled some at the outset of her tenure establishing a sure rapport with financial markets. At the same time, the U.S. economy remains in a fragile state as the current administration ignores wage and job growth to fixate on redistributing income and regulating entrepreneurial spirits into abject submission. Also of concern, developments in the Ukraine, in the Eurozone, and in Asia could each well kick up a financial crisis. The Federal Reserve Board ought not face these possibilities with a new Chairman and short-handed.
Members of the Federal Reserve Board are also members of the Federal Open Market Committee (FOMC) which sets the federal funds rate, the most basic tool of monetary policy. The FOMC was wisely designed to include all the Board members plus the President of the New York Fed and four other regional Fed Presidents on a rotating basis. None of the regional presidents are Senate confirmed. This structure leaves the Board as the primary monetary policy actor, but gives the FOMC a broader range of experience and perspective. With so many open Board seats the FOMC is today notably out of balance, with five unconfirmed regional presidents facing four soon to be three Board members.
The President has nominated Stanley Fischer, a broadly experienced veteran of monetary and international economic policy management to the position of Fed Vice Chairman. The other nominees, Lael Brainard and Jerome Powell also have substantive backgrounds. If in its wisdom the Senate finds any or all of these nominees unsuitable, it should decide so quickly so the President can forward new ones. Otherwise the Senate should confirm them and ensure Janet Yellen and the Federal Reserve have the needed support and leadership.
The need to act swiftly on these nominations does not undermine the seriousness of Senator Paul’s broader concerns. The Federal Reserve through its many policy instruments, its regulatory and supervisory authorities, and its access to highly confidential data is an extraordinarily powerful institution. Yet one of the great lessons of modern governance is the need for central bank independence of action from political pressures.
An immensely powerful institution operating largely independently of political pressures raises serious tensions in a republican government, tensions which can only be resolved with great care for how the Fed’s leadership ranks are filled and how the Congress exercises oversight. Federal Reserve oversight is largely a lost art in the modern Congress. Senator Paul should continue to raise questions about the Fed, just as he should remove his procedural block to the Fed nominations now under consideration.