Photo: The White House
When a President has the opportunity to appoint several Supreme Court justices it’s an opportunity to have a far-reaching, lasting impact on the entire nation, beyond the President’s term.But you don’t hear much about packing the Fed.
Expect to hear a lot more about this, with Donald Kohn having announced his departure.
Kohn’s resignation creates the third current vacancy on the Federal Reserve Board, which will give the administration the ability to pick or reappoint six of the seven members of the Board. It has already appointed Governors Duke and Tarullo, neither of whom have experience in monetary policy, and the President reappointed Chairman Bernanke to a second term as Chairman of the Board of Governors. With Kohn’s departure, Chairman Bernanke is the Board’s only economist. While this might be fine with some, the fact is that such experience and background is critical to policy formation.
This clustering of appointments is not supposed to happen, given the legal structure of the Board, and it gives the current administration the chance to pack the Board with appointees with similar political and economic preferences and leanings. The economic perspective is especially critical, given the Federal Reserve’s so-called dual mandate of low inflation and full employment and the potential tradeoffs between the two, which can critically affect policy and its timing. Our concern here is not whether the present administration is Democrat or Republican, but rather is simply the ability to pick so many governors at one time. This ability is contrary to the intent of how the Board of Governors was structured. Specifically, each of the seven governors is appointed to a non-overlapping fourteen-year term, with a term expiring every two years. Theoretically, this would give an administration the ability to fill at most two vacancies within a President’s four-year term. But of course, Presidents have had the opportunity to make more appointments than that, because governors have typically left long before their terms expired, but the current situation is an extreme. Most governors who have left recently had served substantially less than half their allotted terms (of course, some have filled unexpired terms). There are many reasons for early departures, one of the biggest being the low salary and high cost of living in Washington.
This will get some play in the media (though since the public doesn’t understand monetary policy the way it does, say, abortion, it won’t be nearly as much of a topic. But a fierce political battle will brew behind the scenes. Monetary policy is very divisive, as you can see by the ongoing squabbles between inflation hawks (the WSJ editorial board), and anti-inflation hawks (Krugman, Delong, etc.).