Fed Arithmetic

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Saturday, 27 July 2013 07:39

The Washington Post had a piece discussing views at the Fed about the prospect of either vice-chair Janet Yellen or Larry Summers taking over as chair. At one point the piece discusses the arithmetic of votes on the 12 person open market committee that decides monetary policy. It tells readers:

"The chair sets the tone of the discussion. The Fed staff members who prepare economic projections and the range of policy options work directly for the chair. And the Washington-based governors usually go along with the Fed leader’s wishes (none has dissented since 2005), giving the chair a head start in putting together a majority.

"So, at the end of the day, the Fed chairman can get the policy that he or she wishes. But the ability to persuade and firm up support still matters. If a policy change was regularly enacted on close votes, say 7 to 5, it would send a message to markets that no one was really in charge."

This is a bit misleading. First votes are usually, unanimous so there are not a lot of dissenting votes to examine. Furthermore, Bernanke took over as Fed chair in January 2006, so most of the votes since 2005 have been during his tenure. Of course Bernanke has made a point of consulting closely with his colleagues, as the piece notes, so it is not surprising that he would not have pushed positions that prompted one of the other governors to dissent.

Finally, the arithmetic is likely to be a bit different than is implied in this piece if Summers is appointed. There is already one vacancy on the board of governors. Another governor, Sarah Bloom Raskin, is reportedly considering a top position at Treasury. If she were to take this appointment that would create a second vacancy. Finally, there is a reasonably chance that Yellen would leave if she were passed over for Summers. That would create a third vacancy.

This administration has been very slow in filling Fed vacancies. This is partly due to Republican obstruction tactics and partly to a slow nomination process within the administration. Given this history, it is entirely possible that the vacancies could remain for well over a year. That would mean that the Open Market Committee would include 5 district bank presidents with voting power (all 12 presidents sit in on the meetings) and 4 governors. If Summers tried to get his way without pulling along any bank presidents he would face a serious risk of being outvoted.