Fed Summit: Jacksonian Democracy? (Aug. 23)

Mike & Co.  

Usually, the annual Jackson Hole, WY economic summit, a Davos for central bankers, focuses on examinations and assessments of monetary policy.  And there will be plenty of that this week.   But  this year, institutional introspection will be prominent on the agenda.

The Federal Reserve has been under increasing pressure regarding governance and transparency issue since its outsized role in combatting the financial crisis.   On Thursday, conference attendees plan to meet with a group of community organizers and labor unions calling for a radical overhaul of the Fed.  

Below, we examine the leading proposals offered by reform advocates seeking greater accountability, diversity, and income  inequality awareness at the Fed.




The reform advocates, including groups like Demos and the AFL-CIO are scheduled to meet with four of the presidents of regional Federal Reserve Banks at an event focused on “presenting stories of communities that still have not recovered from the Great Recession.” 

 Platform Position

Fed governance and process issues were taken up in the 2016 Democratic platform.  The document outlined the Party’s Fed reform goals in its section on economic fairness and inequality.  The platform stressed the need to “protect and defend the Federal Reserve’s independence” in carrying out its dual mandate of full employment and low inflation.  But if also underscores the Party’s desire to make the Fed “more representative of America as a whole.”  

 The platform also notes the Democratic Party’s goal to augment the Fed’s independence by prohibiting executives of financial institutions from serving on the boards of the regional Federal Reserve Banks or from selecting members of those boards.  

HRC on Reform of Fed Appointments  

In May, HRC stressed her support for revising the appointment process for the presidents and boards of directors of the Regional Federal Reserve Banks.  While the Board of the Fed itself is composed of executive branch nominees approved by the Senate, the presidents of the Regional Banks are chosen by the banks’ boards of directors, who are in turn chosen in part by representatives of the banking industry.  But some of the appointments are supposed to include representatives of the public. 

 Per a campaign spokesman, HRC believes the Fed should be “more representative of America as a whole” and noted that “commonsense reforms” such as taking bankers off the boards of the regional  Banks, are “long overdue.”

 Under current law, 3 of the 9 seats on each Regional Bank’s board of directors are required to be chosen by representatives of private banks.  The banking industry representatives, however, are no longer allowed to choose regional Bank presidents, a reform implemented as part of Dodd-Frank.  But the appointment process for regional Bank presidents takes place in private, with no public input.  

 Increasing Transparency

The extent of the private sector in the daily operations of the Federal Reserve System has led to calls for increased transparency of the Bank.  Reserve Bank directors frequently interact with financial firms, nonprofits, and other private companies.  (Of note, the Fed is the world’s only major central bank that is not fully public.)

In a 2011 study evaluating Fed governance, the GAO noted that ties to the private sector do not necessarily involve conflicts of interest.  But the GAO recommended that all Reserve Banks clearly document directors’ roles in supervision and regulation activities.  Reserve Banks could also be required to request conflict waivers from the Federal Reserve Board in advance of engaging in operations with the private sector.  The study also proposed that Reserve Banks be required to make information on their board committees and ethics policies available on their websites.  

 Congressional Proposals  

Other reform proposals have been debated in Congress.  In May, Sen. Elizabeth Warren teamed with Rep. John Conyers urging the Fed to commit itself to “more diverse leadership,” noting that no regional Bank president is black or Latino.  Indeed, there has never been an African American president of a regional Bank.  Their letter to the Fed was signed by 116 Members of the House and 11 senators.

In April, Sen. Warren recommended that 

1) the Fed be required to vote on “all major enforcement and supervisory decisions,” 2) ending Too Big to Fail be added as a permanent Fed meeting agenda item, and 3) Congress limit the Fed’s ability to provide emergency lending to troubled big banks.  She criticized the opportunity for such banks to receive low-cost loans from the Fed as undermining market discipline.

In 2015 Senate Banking Committee Chair Shelby introduced the Financial Regulatory Improvement Act (S. 1484), which includes the creation of an independent commission to study the merits of restructuring the Fed’s districts.  This commission would be directed to recommend an increase or decrease in the number of Federal Reserve Bank districts, as well as any changes to the distribution of duties between the Regional Banks and the Board of Governors.  

 After the Jackson Hole summit, the Fed is likely to maintain a low profile during the remainder of the election season.  But but the reform ideas discussed there will likely be heard again during the campaign and certainly during the next session of Congress starting in January.

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