Stanley Fischer, vice chair of the Federal Reserve, announced he will resign in mid-October, while a question remains over whether Janet Yellen will be reappointed as chair when her term ends in January. Fischer’s departure leaves the seven-member board with as few as three sitting members, creating a vacuum of power and an unprecedented opportunity for President Donald Trump to reshape America’s central bank. Wharton finance professor Krista Schwarz, Wharton legal studies and business ethics professor Peter Conti-Brown, and Sebastian Mallaby, senior fellow for international economics at the Council on Foreign Relations, joined the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111 to discuss what lies ahead for the Fed. (Listen to the full podcast using the player at the top of this page.)
The following are four key points from the conversation.
Fischer’s departure can be seen as a watershed moment in American monetary policy.
Fischer, 73, is stepping down from a storied career that blended academic experience with stints at The World Bank, the International Monetary Fund, Citigroup and as governor of the Bank of Israel. His tenure at the Fed created a sense of continuity, and his resignation undoubtedly will be felt.
“You’ve got normally seven governors on the Washington board of the Fed, and right now we’re down to three once Stanley Fischer steps down. More than half the slots are vacant, and if Janet Yellen does leave when her term is [up], that means there’s only two of seven representing continuity,” Mallaby said. “The President has enormous leeway to put his own stamp on the Fed. The mystery is we have no idea what he wants to do with that power.”
Conti-Brown also expressed concern about stability at the central bank.
“As a Fed watcher and someone who appreciates continuity as opposed to disruption … this is very far from ideal,” he said. “It would have been much better for Stanley Fischer to remain vice chair through his term, which would have allowed him either to work with a reappointed Yellen, which I hope is the outcome of Trump’ decision-making process, or to help guide the Fed with the new fed chair.”
Although the role of the vice chair role is “ambiguously defined,” Conti-Brown said, it’s not simply as a stand-in to the chair. “The vice chair exercises enormous leadership, and to have both of these spots vacant simultaneously or filled with new additions troubles me. I think it could be very disruptive, depending on the identity of the people who fill these slots.”
In the Trump administration, it’s difficult to predict the future.
Whether Yellen stays as chair is anyone’s guess, given the unpredictability of the president’s loyalties. Schwarz pointed out that Trump spoke unfavorably about her during the campaign, yet he has praised her since coming into the White House.
“I think expectations have shifted from little likelihood of her staying to increased possibility,” she said. “The things he had criticized her for during the campaign — keeping interest rates too low — now that he’s in office, that is what he would likely want. I honestly don’t think that this is a priority for him at the moment. I think tax reform is foremost on his mind.”
Yellen also hasn’t said harsh words in public about the president, which could help her keep her job.
“The President has enormous leeway to put his own stamp on the Fed. The mystery is we have no idea what he wants to do with that power.”–Sebastian Mallaby“He’s either black or white about people, either in favor or out of favor, and she hasn’t done anything necessarily yet to be out of favor,” Schwarz said.
Mallaby recalled the “absolute melodrama” surrounding Trump’s appointment of secretary of state, with a parade of candidates being considered and dismissed before his selection of Rex Tillerson.
“I fear that with the Fed we might experience a similar thing with a drip, drip, drip of rumors about who’s in the frame and who’s not in the frame, which at some point is probably going to unsettle the market because all of this uncertainty about the leadership of the Fed coincides with a period when the Fed is about to make some pretty consequential monetary policy choices,” Mallaby noted.
Mallaby referred to a board meeting scheduled in late September and the expectation of an interest rate increase before the end of the year.
“After a period in which rates were basically kept at zero without alteration for seven years, we’re suddenly into a period where monetary policy is complicated by the fact that employment seems to be full, yet inflation is weak,” he said. “You’ve just got a very complicated moment for the central bank, which comes right when their leadership is most up in the air. I think that could be unsettling to markets, so unnecessary melodrama around the Fed chair reappointment is going to be bad news.”
Along with talk about Yellen’s reappointment, there have been rumors swirling that Trump could name his top economic adviser, Gary Cohn, to the chair. But Conti-Brown thinks the move is unlikely after Cohn gave an interview in which he criticized the administration’s response to racially motivated violence in Charlottesville, Virginia, saying the White House must do more to stop white supremacy.
Filling the other vacancies on the board of governors is equally important to addressing the chair and vice chair positions, Conti-Brown said.
“Are they going to be credible appointments as a somewhat soft norm of reaching across the aisle and maybe even pairing a Republican with a Democrat? Is that going to happen? All of this is on the table,” Conti-Brown said. “… And if it’s not Gary Cohn, who are the alternatives? [Top adviser] Steve Bannon’s out of the White House, but that doesn’t mean there aren’t other people who have a multi-decade interest in ending the Fed as a functioning institution.”
“It’s much more normal to resign early. I think that’s regrettable. I think it feeds a dysfunction in Fed governance.”–Peter Conti-Brown
Board members typically do not complete their terms.
Each of the seven members on the board of governors is appointed to a 14-year term. The experts said a majority of the members historically have not sat through their entire term, with a few exceptions. The average tenure is a little less than six years.
“It’s much more normal to resign early. I think that’s regrettable. I think it feeds a dysfunction in Fed governance,” Conti-Brown said. “Let’s keep in mind that when Richard Nixon resigned from the presidency, the Senate confirmed some of his Fed appointments the week before. We are not in that place in terms of constitutional crisis in the Trump administration, yet our ability to put people on the Fed’s board of governors is worse than it was in 1974.”
He thinks the government should consider ways to make the job more enticing, perhaps by shortening the term. “Also, we should just go back to the earlier model. Before the Obama Administration, we’d never even had three vacancies.”
Vacancies are bad for the credibility and legitimacy of the central bank because it concentrates power into fewer hands, which is antithetical to democratic principles.
“It’s already a problem to have concentrated, technocratic power in the hands of these technocrats, and it’s very consequential to the economy what happens to interest rates,” Mallaby said. “If that power appears to be even more narrowly concentrated after these seats are vacant on the board, I just don’t see how that enhances the legitimacy of the central bank.”
On the other hand, Mallaby said, the practical functions of the bank can carry on without incident because of the highly competent staff.
Conti-Brown agreed with Mallaby’s points.
“This becomes a question of democratic credibility, not just in diffusing the decision-making across the committee and moving away from the sort of Fed as emperor approach, but also because this is the primary way, and in some ways the only way, of exercising democratic accountability,” he said. “When we’re deprived of this, we’re not able to go through the process that many people hate but is actually quite transparent, quite useful, of vetting these people.”
“I think the most likely next candidate would be a community banker because that’s something that has been lacking.”–Krista Schwarz
Too many vacancies also leave the Fed without a quorum to exercise some of its emergency authority, such as lending in times of crisis.
“If we get to the point where we only have three governors, for many key decisions we lack quorum, and that just feeds dysfunction at the top,” Conti-Brown said.
Finding the right candidate for the board is a tall order.
Schwarz, Conti-Brown and Mallaby agree that Fischer would have made an excellent choice for chair. He brings a balance of research, knowledge and experience in the public and private sectors to the table. That’s what Trump and congressional leaders should be looking for in a replacement.
“You want to have voices from different types of views and perspectives and experiences that they can draw from,” Schwarz said. “I think the most likely next candidate would be a community banker because that’s something that has been lacking. There has been a lot of push to have someone come on the board who can speak for the banks that have been a bit overwhelmed with the increased scope of regulation and being able to comply with all of that as the big banks can. I think that’s a voice that’s important to have.”
Mallaby said the ideal candidate for chair of the board is someone who has not served as a chief executive officer. He thinks the chair needs to be someone with a mastery of economics and politics.
“I think that’s the great lesson of Alan Greenspan’s tenure, that his success as chairman was as much about Machiavellian power plays as it was about his command of the data.”
Mallaby said he’s not sure if members of the Senate can fully recognize a candidate’s depth of expertise in economics, although the confirmation process does serve to root out “someone wacky” from being appointed.
“If they are not adept politically and experienced in Washington, they’re probably going to have their knees kneecapped by the process because there’s just so many bits of hidden furniture that you can run into if you don’t know your way around that city,” he said.
Conti-Brown added that the ideal candidate also needs to be a good manager.
“The Federal Reserve system is a huge, sprawling organization. An ability to manage other humans and the logistics of it is pretty exceptional,” he said. “I would say leadership is important, but if you aren’t able to direct the flow of information and policy through the system, then I think that can be pretty problematic.”