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What if Another Federal Reserve Board Vacancy Opens Before 2017?

The membership of the Federal Reserve Board of Governors (Board) stands now where it has for more than a year-and-a-half: at five confirmed governors and two vacancies. This situation is a bit precarious because if one of the five governors were to leave, it would be difficult for the Board to operate effectively. History suggests that this scenario is one the Board may face before the end of 2016, if the Senate does not confirm any new governors.

Likelihood of Another Vacancy

Research by the Bipartisan Policy Center shows that in a typical year, one Fed governor leaves the Board. Since 1936, at least one governor has left the Board in any given year more than 70 percent of the time.

The rate has increased somewhat since the early 1970s. Starting in 1970, there have been 10 years in which zero governors left office and 35 years in which at least one has. It appears that 2015 will be another year with no departures, but this is due at least in part to three departures in 2014 and the fact that the two current vacancies have not been filled in 629 and 553 days, respectively.

This finding may be surprising, given that Board governors are confirmed to 14-year terms, the third-longest federal term behind only the lifetime appointment of judges and the 15-year term of the U.S. Comptroller General. However, there are several other factors at work.

First, these 14-year terms are fixed with one expiring on January 31 every even-numbered year instead of dating from a governor’s confirmation. Most governors are not given full 14-year terms, but rather inherit the remainder of a fixed-term.

Second, many Board governors are tenured academics who have only limited periods—on the order of two to three years—to be away from their institution before losing tenure.

Further, two of the seven governors are given separate appointments to be chair and vice chair. Those appointments are four years in length and require re-nomination and re-confirmation to remain longer in those positions. A third separate appointment for vice chairman for supervision, a position created by the Dodd-Frank Act, has not seen a single nominee for more than five years.

Finally, departures are idiosyncratic and there is no apparent reason to suspect any currently sitting governor will leave before 2017.

Despite the turnover, the Board has almost always had at least five governors. In fact, since 1936, the Board has only had fewer than five members on a handful of occasions: for six days in early 2009 during the change-over between presidential administrations, for 28 days in 2010, and for three months in 2014. One reason is that the Board operates less effectively with fewer than five governors.

Consequences for Board Operations

The Board sets its own Rules of Organization (rules) regarding its internal processes. In 2001, the Board published the rules in the Federal Register. Following the attacks of 9/11, the Board changed its definition of a quorum in the rules to ensure the Board would be able to act quickly and effectively in a crisis. The change stated that:

A majority of the members in office constitutes a quorum of the Board for purposes of transacting business except that, if there are five members in office, then four members constitute a quorum.

So, in general a simple majority of governors is necessary for a quorum, except that when the Board has exactly five governors, as it does now, four of the governors constitutes a quorum to act on behalf of the agency. If there were four governors, a majority of them—in this case three—would constitute a quorum.

But much of the Board’s business is conducted through its eight committees. Each committee is supposed to have three governors on it. For example, Vice Chairman Stanley Fischer chairs the Committee on Financial Stability, which also includes Governor Daniel Tarullo and Governor Lael Brainard. Governor Tarullo chairs the Committee on Bank Supervision, which also includes Governor Brainard and Governor Jerome “Jay” Powell.

Quorums become an administrative problem for this committee structure when the number of governors falls below five. The Government in the Sunshine Act requires that most federal government agency meetings that include a quorum of its members must be open to the public and noticed in the Federal Register seven days in advance. In the case of the Board, that means that, if there are four governors or fewer, its internal committee meetings would suddenly become public meetings.

There is such a thing as too much transparency and this is one such example. The Board’s votes on actions and policy are appropriately subject to greater disclosure. Subjecting the working levels of an agency created to develop policies, recommendations, and just share knowledge to full public meeting requirements can too easily subject it to unnecessary paralysis. This is particularly true in financial supervision and regulation where sensitive information about specific firms are discussed. In a more general sense, policymakers need space to discuss issues with each other and staff while they are being developed with some expectation of privacy.

Consequences for the FOMC

The Board’s role in monetary policy decisions is also diminished with fewer governors. The Federal Reserve System’s Federal Open Market Committee, which makes decisions on interest rates and other monetary policy matters, is made up of the Board’s governors and five of the 12 Federal Reserve regional bank presidents, on a rotating basis. The FOMC was designed to have greater representation—7 to 5—for the Board vs. the regional presidents. Today, the split is even with five of each. With fewer than five governors, regional bank presidents would constitute a majority. One can debate whether this would be a good thing or not, but the system was not designed expecting such a scenario.

Consequences for the President and Congress

President Barack Obama has nominated individuals to fill both vacancies: Allan Landon and Kathryn Dominguez. Both seats have been vacant for some time due to delays by both the president choosing his nominees and the Senate considering them. As BPC’s Nominations Tracker shows, it took the president 300 days to nominate Landon, and his nomination has been before the Senate for 329 days. The president waited 419 days to nominate Dominguez and her nomination has been before the Senate for 134 days.

The Senate Banking Committee has yet to hold hearings on either nominee and it is unclear whether the committee will do so, or hold a vote on their nominations, before the end of next year. Confirmation may also depend on whether another vacancy opens on the Board. In 2007, President George W. Bush nominated Elizabeth “Betsy” Duke and Larry Allan Klane to join the Board and renominated Randall Kroszner to serve a full 14-year term. Those nominees received hearings but were still pending before the Senate Banking Committee when sitting Governor Frederic Mishkin announced in May 2008 that he would leave office to return to Columbia University. Following that announcement, the Senate moved to confirm Duke’s nomination while letting the nominations of Klane and Kroszner lapse at the end of Bush’s term. Duke was confirmed in June 2008, ensuring that the number of governors on the Board did not fall below five.

It is impossible to predict whether the Board will fall below five members before 2017, but history suggests that a departure would not be unusual. The problems it would present for the operation of the Board are real and both the president and the Senate should ensure they are not realized.

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