Cumberland Advisors Market Commentary –  White House Considers Economist Judy Shelton for Fed Board

Author: David R. Kotok, Post Date: May 13, 2019
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For a history of the Fed Board of Governors and its changes over the past century, see https://www.federalreserve.gov/aboutthefed/bios/board/boardmembership.htm .

Federal Reserve Building

Right now we have five of seven governors’ seats filled. One of those seats is held by Lael Brainard, and she is in a holdover capacity. She was appointed by President Obama in 2014.

In a perfect world there would be seven sitting governors, and they would have staggered 14-year terms. That structure was designed to take the politics out of the Fed so it could act independently as the nation’s central bank. Lots of luck with that one! Anyone who follows the state of our government knows the results are otherwise. That is true under Trump and was also true under Obama and under Bush, and so it goes.

So, how can we get the best out of what we have for our system? That is the question financial market agents should ask. We may opine about political changes that would improve the Fed, but the present system is about all we can ever expect. It may be messy, but it is our American mess.

We thank the many readers who replied to our “Fed Appointees” piece. (See https://www.cumber.com/fed-appointees/.)

Let me quote from a former Fed Reserve Bank president, Charles Plosser, who wrote eloquently about the Fed shortly after his retirement, in the Wall St. Journal on 12/9/2015. He wrote:

“When the Federal Open Market Committee voted Sept. 17 not to raise its target for the federal funds interest rate (the interest rate banks borrow and lend reserves to each other), the tally was a lopsided 9-1. Yet I suspect that the debate was quite lively and the outcome a closer call than the final count suggests.

“Why? The fed-funds target rate typically moves in tandem with the discount rate (the rate the Fed lends reserves to commercial banks). In the two weeks before the FOMC meeting, eight of the 12 Reserve Bank boards, in consultation with their presidents, recommended an increase in the discount rate. Thus at least eight of the 17 participants in the FOMC meeting had a predilection to move forward with a rate increase. Of those eight, three were voting members.”

The point Plosser wanted to make is about a public image, or what he calls a “groupthink” projection. Note that Charles Plosser is very experienced. He was president of the Philadelphia Fed from 2006–2015 and sat on the FOMC during the entire financial crisis. Often there were actions that required board action, and there were only five voting board members because politics (both Democratic and Republican) kept the vacancies from being filled. Furthermore, as a president, Plosser used the discount window board action to convey his views, and he was fiercely independent in his voting decisions.

I asked Plosser about this when we emailed each other after the “Fed Appointees” piece. He said,

“This is evidenced by the block voting by governors (no dissents to speak of in over 20 years) and the tendency of the BoG to sometimes avoid presidential appointments that would likely challenge the prevailing views of the governors and staff. Preserving the diversity of views among presidents is important to preserving political independence and resisting group think. Politicization is bad, as I’ve argued many times; but groupthink and homogeneous governors can be as well and can reinforce the worse tendencies of each. It’s a tough task. Centralizing more power in the board promotes groupthink and makes politicization easier to implement. A dangerous brew.”

We thank Charles Plosser for giving us permission to quote from our discussion.

We are about to go to the second round of Trump’s attempts to appoint folks to the vacancies on the Fed Board of Governors. The scrutiny will be intense and the preliminary vetting much deeper than it was in the first round. As we suggested in our first commentary, we think there is room for business experience and for nonacademics. The twelve regional Federal Reserve banks benefit from that broad exposure on their respective boards.

There is a long road yet to travel in order to reach a full complement on the Board of Governors. The nation will be better off if we get there. And a little dissent and debate may help gain clarity and allow market agents to better assess the direction of Fed policy.

We do not expect the markets to move on the basis of a prospective nominee or even two of them. We saw that with the Cain and Moore episodes. Once the Board is confirmed and the discussion about policy is articulated with a newly composed Fed, market reaction could change. For now, the financial markets will watch as Fed politics unfold.

In what will likely be an intense examination in the US Senate, we expect the newest prospective Fed Governor to be strongly vetted and to achieve success during her confirmation process. Such is our new system. We don’t know Judy Shelton and only can read her writing and public credentials. We wish her well as she moves into the fishbowl of national public life.

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