Election Year Changes at the Fed: What's to come?

By Danielle Hale, Research Economist

Who and What is the FOMC?

The Federal Open Market Committee (FOMC)-the group at the Federal Reserve that decides monetary policy-began its recent bout of easing with a 50 basis point cut in the Federal Funds rate at its regular meeting in September 2007 after the emergence of the credit crunch and subprime mess in August. The ten members who voted for that move included five members of the Board of Governors-two seats of this seven member body were vacant-and five presidents of the district branches of the Federal Reserve. Just before the regular meeting in January, four of the five slots for voting presidents turned over as they do every year, so while the easing has continued through the most recent meeting in April, it did so with the backing of a committee with four of ten new members.

Does the composition of the Committee make a difference?

While there have been dissenting votes since the easing began, none of them has come from the permanent members of the FOMC-the members of the Board of Governors and the president of the Federal Reserve Bank of New York¹. Against the actions in 2007, there were three dissenting votes:

• In October, President Hoenig of Kansas City preferred no reduction in the rate as opposed to the 25 basis point cut that passed at the regular meeting (a preference for not easing).
• In December, President Rosengren of Boston preferred a 50 basis point cut over the 25 basis point reduction that passed at the regular meeting (a preference for greater easing).
• At the emergency meeting in January, President Poole of St. Louis preferred to delay action until the regular meeting one week later. Instead the FOMC cut the Fed Funds rate by 75 basis points.

Since 2008, the dissenting votes are not more prevalent, but they are more consistent.

• President Fisher of Dallas has dissented from each of the January, March, and April cuts preferring less aggressive easing or no easing in each case.
• President Plosser of Philadelphia dissented from both the March and April easing actions citing reasons similar to President Fisher's.

It's unclear whether the more consistent dissent is a result of monetary philosophy, political ideology, or emerging conditions. On the whole, scholars tend to find that monetary policy has become depoliticized largely because there is little disagreement in the economics profession that low, stable inflation is a prerequisite to greater growth and lower unemployment².

Still, the charge of politicization may once have been valid, and with Presidential appointment and Congressional approval required of members of the Board of Governors, politics at the Fed cannot be entirely avoided.

So how will the 2008 election affect the Federal Reserve?

With two empty seats, one seat being temporarily filled by a Governor whose term expired in January, and one that will be vacated on August 31, 2008, the next president may have the opportunity to fill more than half of the seats on the seven member group. Nominations from the Bush White House have languished in committee and are unlikely to move forward.

Because of agreement on the goals of monetary policy, most experts believe that a change in membership will not affect its course. However, it is worth noting that when Governor Mishkin leaves, for the first time since 1935-when the system was restructured by the Banking Act³ and power was concentrated in Washington-the majority of voting FOMC members will be regional bank presidents, not members of the Washington-based Board of Governors of the Federal Reserve. A change may be seen in the Fed's regulatory role. This could be especially true as the Fed and other government entities continue to sort out roles in overseeing the post subprime crisis financial markets.

Whether Chairman Bernanke will be reappointed when his term as Chairman expires in January 2010 remains to be seen. A new administration-headed by either Obama or McCain-will likely take its first few months in office to evaluate the working relationship-which has generally been a more important consideration than ideology-before making a decision on whether he stays or goes at the helm. Should he not be reappointed as Chairman, he would have the opportunity to continue to serve on the Board of Governors until January 2020, but the last chairman in that situation, Arthur Burns left the Board of Governors once his successor had been confirmed.

 

1 "The Federal Open Market Committee (FOMC) consists of twelve members--the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis."
http://www.federalreserve.gov/monetarypolicy/fomc.htm

2  Tempelman, Jerry H. "The Depoliticization of Monetary Policy." Business Economics, April 2008 (16-22).

3 Meltzer, Allan H.  A History of the Federal Reserve Volume 1: 1913-1951. Chicago: The University of Chicago Press, 2003.

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