Whether and how to reform the Federal Reserve System (Fed) has become a hot topic. Senate Banking Committee Chairman Richard Shelby (R-AL) called for increased Fed accountability at a recent hearing. Senator Jack Reed (D-RI) has introduced legislation to make the president of the New York Federal Reserve Bank subject to presidential appointment and Senate confirmation. Senator Rand Paul (R-KY) reintroduced his “Audit the Fed” legislation, which passed the House of Representatives with strong bipartisan support last year. Financial industry leaders like the Financial Services Forum’s John Dearie have proposed adding two new regional Fed banks and giving the regional bank presidents a larger say on the Fed’s Federal Open Market Committee. Calls for change are even coming from within the Fed, with Dallas Federal Reserve Bank President Richard Fisher recently proposing changes to the Fed’s voting structure.
BPC agrees that reform to the Federal Reserve System is necessary and important. Here is a simple idea that could have a lasting impact: choose new leaders that don’t come from inside the Fed.
According to our recent research, 10 of the current 12 sitting Federal Reserve Bank presidents worked directly for a regional bank or served on a regional bank board immediately prior to being appointed as president. Most recently, when the Federal Reserve Bank of Philadelphia named its new leader in March, it chose University of Delaware President Patrick T. Harker, who served for the last three years on the Philadelphia Fed’s board.
Having an inside track is not a recent phenomenon. Since 1990, 17 of the 25 regional bank presidents have been immediate past employees or board members of a regional bank.
To be sure, promoting from within provides the benefit of institutional knowledge and familiarity with regulatory priorities. The downside is that it can lead to insularity and groupthink that can prevent new and potentially innovative ideas from getting heard, and lousy ones from being shut down. This is particularly troubling for an institution with the sole responsibility for setting the nation’s monetary policy, and the responsibility for overseeing the largest U.S. financial institutions. These areas are complex, and entail making difficult choices. The Fed was designed to represent a broad array of interests to properly weigh them and find the best policy solutions. Constructive debate from individuals with varied backgrounds and experience can improve policy choices and outcomes.
While the need for regional bank candidates with more diverse experience is clear, the current structure appears to promote internal hiring. Potential candidates are selected by the regional bank’s boards of directors, who are selected, in large part, by the banks themselves. Since regional banks select board members and boards select bank presidents, the status quo remains unchallenged. This dynamic may hinder opportunities for outside candidates.
Groupthink is also problem at the Federal Reserve Board of Governors. Fed governors work in Washington and are appointed by the president for 14-year terms, one of the longest terms in all of government. The long terms were designed to encourage independent thought in order to effectively articulate and consider different points of view when the Fed meets to vote on monetary policy. In the past, Fed governors and regional bank presidents regularly disagreed and cast dissenting votes. While some Fed regional bank presidents continue to dissent, Fed governors have ceased publicly disagreeing with the chair. There has not been a single dissenting vote by a Fed governor on monetary policy in almost a decade, the longest streak since the Fed began recording votes in 1957. In fact, there have only been two dissents by Fed governors in almost twenty years, since 1996, according to research by the Federal Reserve Bank of St. Louis.1
Bring in Outside Leadership and Promote More Debate and Dissent
Federal Reserve regional banks should change their decision-making process when hiring new bank presidents to ensure outside candidates can challenge orthodoxy with sound analysis so new ideas are getting a fair shake. The Federal Reserve Board of Governors, which can veto the selection of regional bank presidents, should require regional bank to consider candidates from outside the Federal Reserve System.
BPC encourages the Fed to look at outside candidates to fill the currently open positions in the regional banks. The Dallas Fed’s Fisher just stepped down from his position and Minneapolis Fed President Narayana Kocherlakota announced that he will retire at the end of 2016. In 2017, Atlanta Fed President Dennis Lockhart will also retire. As Lockhart and Fisher were the only two of the current Fed presidents to have come from outside the Fed, there is a real possibility that by the end of 2017, if BPC’s advice is not heeded, every single Federal Reserve regional bank will be headed by someone from inside the Federal Reserve System.
1 Daniel L. Thornton and David C. Wheelock, “Making Sense of Dissents: A History of FOMC Dissents,” Federal Reserve Bank of St. Louis Review, 96, no.3 (2014): 216.