openpolitics.com

Due to a confluence of resignations and openings, the president could remake the central bank in just a year or two. That was never supposed to happen.

Fed governors have 14-year terms—only judges serve for longer—and they’re carefully staggered so that one governorship expires every two years. That’s supposed to ensure that each presidential term, the president can nominate two governors, insulating the central bank from political pressures, so that no administration would have too much influence over monetary policy.

But since its inception in 1935, this system has almost never worked. Governors have almost never stuck around for the fully 14 years, and over the past few decades, they’ve spent fewer and fewer years in office. The average Fed governor appointed in the 1950s served more than 10 years. Since 2000, that has dropped to just five. The last person to stay for a full 14 years was Alan Greenspan, nominated in 1987 by President Ronald Reagan.

Why are Fed governors leaving sooner than their predecessors? The simplest answer, experts said, is money. As members of the most powerful financial institutions they’re sought-after by hedge funds, banks, and other financial institutions where they can make far more money than they did on the board. Fed board members make around $200,000 each year, far less than they can make at a private firm—and even less than the presidents of the regional Federal Reserve banks.

“How much the person can earn in the private market is rising and rising and rising,” said Blinder, who said that his time on the Fed board in the mid-1990s hurt his finances. “I don’t want to plead poverty and I’m not poor today, but my net worth was dwindling every year—and unless you are a very rich person, you can’t let that go on forever.”

.. Recently, partisan infighting has begun to infect the process as well. After Republicans took control of the Senate in 2014, they refused to confirm Obama’s two nominees for open Fed governor spots.

In that sense, Senate Banking Committee Chair Richard Shelby is partially the reason why Trump has such an opportunity to remake the central bank today: He refused to schedule a committee vote on two open spots that Trump now gets to fill.

.. The 14-year clock doesn’t reset when a governor resigns, so multiple people can hold one “term.” In fact, Quarles is the fourth person to hold this seat during the single 14-year governorship—and the term ends at the end of January. In other words, Quarles’ appointment expires just a few months after he was confirmed. “That’s ridiculous,” Blinder said.

.. Conti-Brown argued that Quarles’ short term is not just an extra burden for Congress but also is a threat to the Fed’s independence. If Quarles does not act as Trump wants, he worried, Trump could just withdraw his nomination. In other words, until he’s confirmed for another term, Quarles is effectively serving at the pleasure of the president.

.. The Trump administration could have instead nominated Quarles for one of the other open governorships, which don’t expire for multiple years. Conti-Brown said there’s no legal explanation for why Trump chose to fill the short-term opening while leaving the long-term seats unfilled.

.. One simple way to fix these problems with Fed governance is to raise the pay for Fed governors, not necessarily to be competitive with private sector salaries but to be at least competitive with the presidents of regional Fed banks, who typically earn $300,000 to $400,000 annually.

.. Each new governor’s term should start fresh, so that their term never expires soon after they’re confirmed. Blinder, whose term was up just 18 months after he was confirmed, said that he would’ve stuck around longer if his term had started fresh.