Fed Reserve Bank Presidents: Immune To Political Pressure?

In response to my recent commentary “When Will the Fed Begin Tapering Its Asset Purchase Program?” two astute readers pointed out a technical problem in my discussion of Federal Reserve Bank presidents and their terms. Specifically, I stated that Richard Fisher, President of the Federal Reserve Bank of Dallas, faced a mandatory retirement in 2014 at age 65. I was aware that in a couple of cases exceptions had been made, but some further digging proved interesting. Here is what is posted on the Federal Reserve Board of Governors’ website (and is probably more information than one wants to know):

The Federal Reserve Act provides that the president of a Federal Reserve Bank shall be the chief executive officer of the Bank, appointed by the board of directors of the Bank, with the approval of the Board of Governors of the Federal Reserve System, for a term of five years.

The terms of all the presidents of the twelve District Banks run concurrently, ending on the last day of February of years numbered 6 and 1 (for example, 2001, 2006, and 2011). The appointment of a president who takes office after a term has begun ends upon the completion of that term. A president of a Reserve Bank may be reappointed after serving a full term or an incomplete term.

Reserve Bank presidents are subject to mandatory retirement upon becoming 65 years of age. However, presidents initially appointed after age 55 can, at the option of the board of directors, be permitted to serve until attaining ten years of service in the office or age 70, whichever comes first.

The statement implies that if a Reserve Bank president is younger than 55, then he or she can fill the expired term of his or her predecessor and subsequently can be appointed to successive five-year terms until reaching the mandatory retirement age of 65. The most recent long-serving president was Tom Hoenig, who was president of the Federal Reserve Bank of Kansas City and served for 20 years from 1991 to 2011.

However, in President Fisher’s case, since he was appointed president of the Federal Reserve Bank of Dallas after the age of 55 (at age 56), he would be permitted under current rules to serve for a maximum of 10 years, or until 2015, not 2014, as I stated in my commentary. This means that there would be potentially 6 rather than 7 new faces on the FOMC (as I had originally said), assuming no one else decides to depart. Regardless, the basic conclusion holds: a significant portion of the voting members of the FOMC potentially are not even known or will not be in place when the FOMC begins its tapering process, should it begin this year.

Revised in 1997, the mandatory retirement provision applying to Federal Reserve Bank presidents appointed after age 55 was known inside the System as the “McDonough rule.” President McDonough was 59 when appointed president of the Federal Reserve Bank of New York in 1993 and otherwise would have had to retire in 1999, but the change permitted him to serve until mid-2003. That same rule permits President Fisher to stay on at the option of the Dallas Bank’s board of directors until 2015 and President Lockhart, presently age 66, of the Federal Reserve Bank of Atlanta, to serve until March 1, 2017, should that bank’s directors approve. Again, this is because President Lockhart was over 55 when he was appointed on March 1, 2007. Other standing bank presidents covered by the McDonough exception are President Plosser, appointed in August 2006 and thus permitted to serve for 10 years to August 2016, and President Dudley of the Federal Reserve Bank of New York, who can conceivably stay until January 2019. In contrast, the other remaining presidents will be able to serve until age 65. These include Presidents Evans, George, Kocherlakota, Rosengren, and Williams. Of course, the ability to continue serving is at the option of the respective reserve banks' boards of directors.

There are a couple of other loose ends that also affect the appointment of bank presidents, first vice presidents and members of the Federal Reserve Board.

First, prior to the Dodd-Frank Act, the three classes of Bank directors could participate in the search for and appointment of a Reserve Bank’s two senior officers. They include the three Class A directors (bankers), and three Class B and three Class C directors (representing the general public). Class B directors are elected by the member banks in the Reserve Bank district, while Class C directors must have resided in the reserve district for two years and are appointed by the Board of Governors. Dodd-Frank contains the following passage that removed Class C directors from the officer appointment process:

Section 4 of the Federal Reserve Act, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), provides, in part, that “[t]he Class B and Class C directors of the bank…” Section 4 further provides, in part, that “[t]he first vice president of the bank shall be appointed in the same manner and for the same term as the president…” Prior to the Dodd-Frank amendments, the entire Reserve Bank board of directors, including the Class A directors, was responsible for appointing the Reserve Bank president and first vice president.

Presumably this change was made in response to some controversy surrounding the appointment of the president of the Federal Reserve Bank of New York and to remove any concerns about conflicts of interest where member banks might be involved in selecting their primary supervisor.

The second issue concerns the term for those appointed to the Federal Reserve Board. The seven Governors are appointed to 14-year terms that expire on a staggered basis every two years. A Governor that is appointed to an unexpired term can complete that unexpired term and then be appointed to a full term. Indeed, the two longest serving Governors are William McChesney Martin and Allan Greenspan; each served for about 19 years. The intent for staggered terms is described on the Federal Reserve Bank of NY’s website.

The length of the terms and the staggered appointments process are intended to contribute to the insulation of the Board—and the Federal Reserve System—from day-to-day political pressures to which it might otherwise be subject. If all governors serve full terms, a U.S. president would be able to appoint only two governors in a four-year presidential term and four—a majority of the governors—during eight years in office. In reality, however, many governors leave before completing their 14-year terms, and recent presidents have made more than one appointment to the Board every two years.

Indeed, because so few Governors have served full terms, President Obama could conceivably be able to appoint all seven members of the Board by the end of next year. So much for political independence.

BY Bob Eisenbeis