While traders and policymakers preoccupy themselves with the question of Federal Reserve Chair Jerome Powell’s reappointment, a quiet battle for influence within the institution is intensifying. The exit of two regional officials could quiet dissent and further strengthen the chair’s considerable grip on monetary policy in the world’s largest economy.
Eric Rosengren, president of the Boston Fed, and Robert Kaplan, his counterpart in Dallas, said Monday they will leave their posts. Rosengren cited ill health, but both he and Kaplan had come under mounting criticism after their 2020 financial disclosures showed they held and traded financial assets while the Fed was actively supporting markets through the pandemic. The revelations brought widespread criticism of potential conflicts of interest and underscored concerns that ultra-easy monetary policy benefited the wealthy. Even if both had cleared Fed rules and ethical guidelines, the optics were abysmal.
Powell, whose term is up early next year, is being considered for a second run by the White House. This is no time for drama. As the Fed seeks to defuse criticism, its leadership in Washington is likely to grab more influence over appointments at the regional banks, which are now made by boards typically composed of local lenders, businesses and nonprofits. Powell also has ordered a comprehensive review of stock-trading policies. “It is now clearly seen as not adequate to the task of sustaining the public’s trust,” he told a press conference last week.
It would be a mistake to see the fracas with Rosengren and Kaplan as simply the product of some ill-timed transactions. Tensions have long simmered between the Board of Governors in Washington, which includes the chair, vice chair and vice chair for supervision, and the dozen district Federal Reserve banks. The leaders of most district banks, who rotate among voters on the interest-rate setting Federal Open Market Committee, get to weigh in policy. Yet, unlike governors, they are not nominated by the White House or confirmed by the Senate. They typically earn more than governors, and often even the chair, the most powerful economic official on the planet. (Fed chairs are among the lowest paid among global monetary honchos.)
FOMC members vote on the direction of interest rates. Dissenting votes are pretty common among bank presidents. By contrast, there hasn’t been a dissent among governors since 2005, when Mark Olson voted against raising rates in the aftermath of Hurricane Katrina. When district banks vote against the herd, they tend to put their own spin on the decision, sometimes issuing competing statements.
This can produce a warped sense of where the Fed is going and how fast it may get there. I often hear people talk about a “hawkish” Fed based on speeches by one or two district chiefs, often ignoring the speaker’s history of recalcitrance. When the big decisions are made, it’s the chair, vice chair, head of the New York Fed and staff — usually in the Division of Monetary Affairs in Washington — that matter. These public counter-narratives are where the district folks can get annoying.
Previous efforts to rein in the district banks by rules or statute have fallen short. In the aftermath of the global financial crisis, there were some calls in Congress to make the president of the New York Fed, who has a permanent vote on the FOMC, a job that would be subject to presidential appointment and confirmation by the Senate. Opponents argued then that it would increasingly politicize the Fed, and it ultimately didn’t happen. A legislative push today might have a better shot at success.
A true reappraisal of the weight district banks have might only be accomplished by a revision to the Federal Reserve Act, which was passed in 1913. The idea then was to deliberately build in checks and balances. The challenge with revisions to major acts is that you never really know what comes in and goes out of the congressional sausage-maker.
In the meantime, the clout of the district players will be marginalized. The tragedy is that articulate and flexible regional managers like Rosengren and Kaplan brought it upon their successors.