President Barack Obama is running out of time to fill two empty seats on the Federal Reserve Board of Governors this year, just as U.S. central bankers start to lay plans to exit from record monetary easing.
The White House hasn’t nominated anyone for the seats on the seven-member board, and even someone submitted this week wouldn’t be confirmed until two weeks after the Nov. 4 elections, if history is any guide: the Senate has taken an average of 119 days to confirm Obama’s 10 Fed Board nominations since 2009.
“The clock has almost run out,” said Aaron Klein, a Democratic former chief economist for the Senate Banking Committee, which approves Fed nominees.
For the White House, the Fed is taking a back seat to crises foreign and domestic, from strife in the Middle East and Ukraine to U.S. health care and immigration. Appointments to the federal judiciary are a more pressing issue than the Fed, said Jim Manley, a former spokesman for Senate Majority Leader Harry Reid, a Nevada Democrat.
“They are more interested in confirming as many judges and other executive branch nominees as possible for what is left of the legislative session,” said Manley, now senior director of communications at Quinn Gillespie & Associates LLC in Washington.
Getting nominees through the Senate may get harder after the November elections. The Democratic Party is likely to lose seats or even control of the chamber, according to Larry Sabato’s Crystal Ball, an election analysis website run by the University of Virginia’s Center for Politics.
“If the president doesn’t nominate some people shortly, it’s hard to see them getting through the process before the election, and after the election the process may be significantly more difficult,” said Klein, now the director of the Financial Regulatory Reform Initiative at the Bipartisan Policy Center in Washington.
The increased difficulty in getting Fed nominees confirmed reflects growing politicization of an institution that has been increasingly engulfed in Washington’s partisan warfare during the Obama administration.
Nobel-prize winning economist Peter Diamond withdrew from consideration to be a Fed governor in the face of Republican opposition 14 months after Obama nominated him. House Republicans this year have proposed legislation to limit how the Fed makes monetary policy, and Jeb Hensarling of Texas, chairman of the House Financial Services Committee that oversees the Fed, has called a series of hearings to scrutinize the central bank.
Getting nominees through the Senate became easier after Reid changed the chamber’s rules late last year to allow approval of all nominees, except those to the Supreme Court, by a simple majority rather than 60 votes. The move effectively stripped the minority party of the power to block almost all of Obama’s nominees.
Meanwhile, Fed Chair Janet Yellen and her colleagues have a full agenda. They are drawing up a strategy to reduce a record $4.41 trillion balance sheet and raise interest rates for the first time since 2006, which officials project will happen sometime next year. Policy makers are set to continue discussions of the exit when they meet July 29-30.
Under the Fed’s decentralized structure, monetary policy is the purview of the Federal Open Market Committee, which also includes five of 12 district bank presidents. The presidents aren’t subject to Senate confirmation.
Yet for the Washington-based governors, that’s only part of their job. All of them serve on committees that make decisions on everything from reserve bank operations and staff compensation, to supervision and regulation.
The board is also working to implement the 2010 Dodd-Frank Act overhauling financial regulation and stress-testing the biggest banks to ensure they can withstand another crisis. The Fed and other regulators have completed just 208 of 398 rules required by Dodd-Frank, according to an analysis by law firm Davis Polk & Wardwell.
“The Fed is operating on all cylinders -- monetary policy, financial stability, regulation and supervision -- and the board should not be short-staffed,” said Laura Rosner, a U.S. economist at BNP Paribas SA in New York and a former researcher at the Federal Reserve Bank of New York. “These seats should be filled as soon as possible.”
The delay also denies community banks representation at the Fed at a time they are shouldering new regulatory burdens. The Fed historically has had a community banker or supervisor on the board. Two board members with such experience, Sarah Bloom Raskin and Elizabeth Duke, have left.
Senate Banking Committee Chairman Tim Johnson, during Yellen’s July 15 testimony to the panel, said he wants “swift nomination” of governors with small-bank expertise and “tough” oversight experience.
“It’s important that the Fed maintain a full complement of governors to effectively carry out its monetary policy and regulatory functions,” said Johnson, a South Dakota Democrat.
The legislative calendar isn’t working in Obama’s favor. Lawmakers will be out of town for all of August and then have just 10 work days scheduled in September and two days in early October before the Nov. 4 elections. After that, members are scheduled to be in session for just 15 days for the remainder of 2014 in a so-called lame duck session.
White House National Economic Council director Jeffrey Zients told Bloomberg Television June 27 Obama plans to nominate two people soon. “We’re absolutely committed to filling those spots,” Zients said. “We will nominate folks soon. This is a high priority and we’re working on it.”
Jennifer Friedman, a White House spokeswoman, and Michelle Smith, a Fed board spokeswoman, both declined to comment yesterday on the status of possible nominations.
The Fed board hasn’t had a full roster of members since Ben S. Bernanke left in June 2005. Four months later, he was nominated as chairman to fill the spot left by Alan Greenspan.
Bernanke was succeeded by Yellen, whose confirmation by the Democratic-controlled Senate took 89 days. Fed Vice Chairman Stanley Fischer waited 128 days before his May 21 confirmation to the board, just one week before Governor Jeremy Stein’s departure would have left just three board members.
Stein’s seat is one of the two vacancies. The other was left empty by Raskin, who left in March to join the Treasury Department.
“Chances that the seats will be filled dim every day,” said Sarah Binder, a senior fellow in governance studies at the Brookings Institution in Washington who specializes in studying the relationship between the Fed and Congress. “Fall elections with control of the Senate at stake mean that senators will be eager to recess in early October, if they make it that long.”
Obama probably doesn’t see the seats as pivotal for monetary policy and probably believes the Fed is “in good hands” with Yellen and Fischer as leaders, she said.
Robert Shapiro, chief executive officer at Sonecon LLC, an economics advisory firm in Washington, said he’s not worried by the vacancies because much of the Board’s work is carried out by top career staff among its 2,648 employees.
“It could have some marginal effect on the efficiency of the regulatory operation,” Shapiro, who serves as an adviser to the International Monetary Fund and was a Commerce Department official under President Bill Clinton, said. “It’s a very staff-driven institution.”
That’s not the view held by Democratic Senators Jeff Merkley of Oregon and Elizabeth Warren of Massachusetts, who wrote Obama on May 28, saying “it is critical that the two remaining nominees for the board be leaders who possess expertise in financial regulation and have demonstrated a strong commitment to financial reform.”
Mark Calabria, an economist and the director of financial regulation studies at the Cato Institute in Washington, said he’s surprised Obama hasn’t submitted nominations in time for approval before November.
“It’s puzzling to me because it’s like a free political win,” said Calabria, a Republican former senior aide for the Senate banking panel. “It’s wired to me as an economist that when you have something of value you don’t sit on it.”