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Economic Forecasts

Changing of the Guard at the Fed

The June resignation of Federal Reserve Board Governor Donald Kohn will leave the Fed with three open spots.

Come late June, odds are the Federal Reserve will have just four sitting Governors. The resignation of Donald Kohn, effective June 23, will make the board’s third vacancy and the fourth open spot that President Obama will get to fill. In January, Obama appointed Daniel Tarullo to one open spot, and a month later he reappointed Ben Bernanke, originally named by President George W. Bush, as board chairman. Another two positions at the board have been vacant for over a year, awaiting nominations by the White House.

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Congress is likely to pay a lot more attention to new Fed nominees than it has in the past. Typically, Senate confirmations of Fed governors are pretty tame affairs. Presidents have traditionally made their choices with an emphasis on technical competence over ideological purity, resulting in a politically centrist organization. And Obama isn’t likely to stray from that path. But given the Fed’s central role in the recent financial crisis and the fragile state of the economy, lawmakers are likely to poke and prod any nominee with more vigor than usual.

The composition of the board can have important, if subtle, implications for the central bank and the U.S. financial environment. The appointment of Tarullo, for example, brought to the Fed a legal expert who favors more international cooperation on matters of financial regulation and is inclined to stretch further into consumer protection. Bush appointees, in contrast, had more free market inclinations. But Fed governors enjoy long terms of service -- 14 years -- providing political independence. And just as it is with Supreme Court justices, their performance in office doesn’t always comport with predictions. Clinton appointee Laurence Meyer, for example, was expected to be an “inflation dove,” favoring looser credit. But he argued for higher interest rates once in office.

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In the current economic and political climate, only a centrist nominee is likely to get the nod from Congress. But this White House is likely to continue to shift control of the Fed in a slightly more activist direction.

The fact is, though, that development of financial regulatory reform legislation that could dramatically reshape the Fed will likely overshadow any nominations to the board. Proposals in the Senate, for example, could strip the Fed of its bank regulatory and consumer protection responsibilities, and House proposals to “audit” the central bank could diminish the Fed’s independence, putting its policy moves under a political microscope.

Meanwhile, the Fed’s loss of Kohn, said to have been former Chairman Alan Greenspan’s choice to be his successor, will be felt. He was a key player in addressing every financial crisis since the Chrysler bailout in 1979. Moreover, having served the Fed for 40 years, including eight years as governor and two years as vice chairman of the Board of Governors, Kohn has been called the most important nonchairman member of the board in its history.

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