With the announcement earlier this week that Federal Reserve Board of Governors member Daniel Tarullo will resign effective April 5, 2017, the Federal Open Market Committee (FOMC) will likely find itself in a highly unusual situation come April, one in which the regional Federal Reserve Bank Presidents on the FOMC outnumber the members of the Board of Governors. The Board of Governors of the Federal Reserve System has been operating with two vacancies for several years, following the resignations of Jeremy Stein and Sarah Bloom Raskin in 2014, and Tarullo’s resignation will bring that to three open positions.
Let’s recall the structure of the Fed’s Board of Governors. Each of the seven governors is appointed to a 14-year term, with each term beginning on February 1st in an even-numbered year every two years and expiring 14 years later on January 31st. So a new term began on February 1, 2016, another will begin on February 1, 2018, another on February 1, 2020, etc. The two current open terms are the one that began in 2016 and the one that will begin in 2018. Tarullo’s term expires January 31, 2022. A governor appointed to a full term may not be reappointed, but a governor appointed to fill the remainder of an unexpired term may be reappointed for another full term.
The two current openings mean that President Trump could appoint someone to the current unexpired term that expires January 31, 2018, then reappoint that person to a full term that expires January 31, 2032. He could also appoint someone to the unexpired term that began February 1, 2016 that expires January 31, 2030, and that person could then be reappointed in 2030 until 2044. With Tarullo’s resignation, he could appoint someone to fill that unexpired term and, if he wins re-election in 2020, reappoint that person to serve until 2036. Finally, Vice Chairman Stanley Fischer’s term expires January 31, 2020, giving President Trump a fourth appointment opportunity until 2034. And, since Chairman Janet Yellen’s term as chairman expires in 2018 (her Board position expires in 2024), President Trump will also get to pick a new chairman next year.
While much ink has been spilled over President Trump’s Supreme Court choice, it’s arguable that his decisions on who to appoint to the Board of Governors of the Federal Reserve System will have a far greater impact than any Supreme Court Justice ever could. Like it or not, the Federal Reserve System has an outsized influence on the lives of American citizens, as well as people around the world. The Fed is the institution responsible for monetary policy and its actions have a greater impact on day-to-day life than the Supreme Court could ever hope to. The stability of the dollar, the dollar’s purchasing power, and the standard of living of the American people are all dependent upon the Federal Reserve’s actions. The history of the Fed over the past 40+ years has been one of loose monetary policy, benefiting debtors (particularly the US government) while punishing savers and investors. Might that change under President Trump? We should certainly hope so. The ability to determine the majority of the Fed’s Board of Governors within his first term is an opportunity that President Trump should not take lightly.
Now, we have to be realistic and realize that most appointees to the Board don’t serve out the entirety of their terms. Alan Greenspan was the last Board member to serve out a full term, serving the remainder of an unexpired term plus a new 14-year term. In fact, only two other Federal Reserve Board members have ever served out an entire 14-year term, William McChesney Martin (1951-1970) and George Mitchell (1961-1976.) Four to eight years seems to be the average for most members, enough to make good connections and then cash out when the next Administration takes the reins or some more lucrative opportunity comes along.
This makes it all the more important for the Trump Administration to pick both good candidates and candidates who are willing to stick to it for the long haul. With the opportunity to select a majority of the Fed’s Board of Governors and the Chairman in his first term, President Trump will have the ability to impact monetary policy as no other President has. If he is able and willing to appoint solid sound money advocates to the Board of Governors we could see a dramatic sea change in the Board’s conduct of monetary policy.
The media likes to deride President Trump as a supporter of the gold standard, but even a government-run gold standard would be better than the monetary nihilism that exists today. Just imagine what might happen if President Trump appointed four gold standard sympathizers to the Federal Reserve Board, creating a majority within the Board. Imagine what might happen within the FOMC, as the gold standard-supporting Board members link up with the more hawkish Presidents from Federal Reserve Banks such as Richmond, Kansas City, and Philadelphia. Is that a far-fetched dream? Perhaps. But it is at least a possibility today, unlike any other Administration in recent history. A majority of the positions on the Federal Reserve’s Board of Governors will be open during the tenure of the (hopefully) most anti-Establishment, most free market and gold standard-friendly President since Ronald Reagan. The worst case scenario is the same old, same old; appointment of the same technocratic economists who don’t want to rock the boat.
The best-case scenario is the appointment of a truly diverse Federal Reserve Board, one that for the first time might showcase members who have an understanding of economic reality and the business cycle, rather than the Keynesian monobloc that dominates both academia and public policy, neglects monetary policy alternatives, and is always caught flat-footed at the first signs of crisis. Rather than engage in fatalism, let’s be hopeful that President Trump will make solid appointments to these positions so that we have at least some hope of righting a monetary policy ship that is otherwise doomed to sink.