Representative Barney Frank (D-MA) has introduced a measure that would change the membership of the Federal Open Market Committee (FOMC), the group within the Federal Reserve that sets short-term interest rates by intervening in the federal funds market.
The FOMC currently consists of the seven members of the Board of Governors of the Federal Reserve System, who are nominated by the President and confirmed by the Senate, plus five of the twelve presidents of the regional Federal Reserve Banks, who serve in rotation on the FOMC (except for the President of the New York Federal Reserve Bank who serves as permanent vice chair of the group).
The Frank proposal would remove the regional bank presidents from the FOMC. He argues that because the presidents are chosen by their boards of directors–six of the nine directors are elected by the member banks within the Federal Reserve district–they represent the interests of bankers rather than the public.
Opponents, such as former Dallas Fed Vice President Gerald O’Driscoll, argue that such a change would make the FOMC more political, would concentrate too much power in Washington, and would reduce the regional perspective that the reserve bank presidents bring to discussions of monetary policy.
Neither side has it completely right.
Of all the agencies of the US government involved in economic policy making, the Federal Reserve is among the least partisan. A full term on the Board is 14 years, long enough to provide a large degree of independence for members. Although it is true that Board members often do not serve a full term, among the more than 60 people appointed to the Board since 1935, the average length of service is about six years. Furthermore, incoming presidents are typically forced to live with their predecessor’s appointment as chairman for the first two years of their term.
On the other hand, doing away with regional representation on the FOMC would be a mistake. Given that economic conditions frequently vary across the country, allowing the reserve banks to have input into monetary policy decisions and advocating for the needs of their regions is useful.
Representative Frank’s observation that the boards of directors of the regional banks disproportionately represent bankers is correct. As the system is currently set up, the boards have nine members: three are bankers elected by the bankers of the district; three are chosen by the bankers to represent the public, specifically “agriculture, commerce, industry, services, labor, and consumers”; and three are chosen by the Board of Governors to represent those same interests.
One way of addressing Representative Frank’s concerns would be to change the way middle group of directors are selected, so that they are not only for agriculture, commerce, industry, services, labor, and consumers, but by them as well. Attacking the problem at its root is the most sensible solution.