Greenspan’s Bequest to Yellen Is Board Harmony Shown in RecordsJoshua Zumbrun
Janet Yellen is poised to take charge of a Federal Reserve System where boardroom dissent has become increasingly rare, making the central bank’s governing body an unusual example of harmony in a divided capital.
Records spanning a quarter-century of meetings of the Fed’s Washington-based Board of Governors show a pattern of increasing unanimity among the members, who number seven when there are no vacant seats. Bloomberg News obtained the files from the Fed under a Freedom of Information Act request filed in 2011.
For Yellen, President Barack Obama’s nominee to succeed Ben S. Bernanke as Fed chairman, a cohesive board would be an asset her predecessors didn’t always command. It will take some work to ensure the pattern continues, said Nathan Sheets, formerly the top economist in the Fed’s international finance division.
“The momentum for having the governors support the chairman is enormous,” said Sheets, who is now global head of international economics at Citigroup Inc. in New York. “But any chairman has to nurture that and maintain the relationships.”
The documents provide a window into the culture of the board of governors, where Yellen will take the gavel early next year if she is confirmed by the Senate. Under former Chairman Paul Volcker and early in the tenure of his successor, Alan Greenspan, dissent at the board was common. Eventually Greenspan brought the other governors into line.
Dissents that averaged 21 a year in the 1986-1993 period dwindled to five annually in 1994-1997, then to zero for a decade. Dissents reappeared as the financial crisis heated up in 2008, when there was one, and in 2009, with four. There were none again in 2010, the last year for which the Fed provided records of board meetings.
The Fed’s board of governors holds hundreds of votes every year, pertaining to everything from regulations, to bank mergers, to internal budgets and staff salary and benefits. The body is distinct from the Federal Open Market Committee, the panel that makes monetary policy decisions, which includes the Fed’s 12 regional presidents as well as the governors.
Since June 2011, every meeting of the FOMC, whose votes are public record, has included at least one dissent from a regional president. No governor has cast a negative vote on an FOMC decision since September 2005, when Mark Olson sought a pause in rate increases after Hurricane Katrina.
The records also show where Yellen might encounter challenges. Among the rare instances of disagreement among governors in recent years, the record reveals previously unreported dissents from Daniel Tarullo.
On Sept. 29, 2009, Tarullo voted against Narayana Kocherlakota’s appointment to become president of the Federal Reserve Bank of Minneapolis. In August of that year he voted against the appointment of Richard Smucker, chief executive officer of food producer J.M. Smucker Co., as a director of the Federal Reserve Bank of Cleveland. In November, Tarullo abstained from voting on director appointments at Fed branches in Minneapolis and six other cities.
Tarullo “has a high regard for both President Kocherlakota and Mr. Smucker,” said David Skidmore, a spokesman for the Fed, in an e-mail. “At the time of President Kocherlakota’s appointment, Governor Tarullo would have preferred a candidate with experience in a broader range of matters dealt with in Reserve Banks, in addition to monetary policy.”
Regarding Smucker’s appointment, Skidmore said Tarullo “believed that business interests were already very well represented on the Cleveland Board and he would have preferred a candidate with a different professional background.”
Yellen would take over the chairmanship at a delicate time for the central bank. The Fed is considering when to begin winding down its $85 billion a month in bond purchases and still has work to do on implementing new banking rules under the 2010 Dodd-Frank regulatory overhaul.
Economists had expected the FOMC to begin reducing purchases at its Sept. 17-18 meeting, according to a Bloomberg survey before the gathering. The committee surprised investors by refraining from cutting the program in September, and reaffirmed the $85 billion pace in October.
“The Fed has come in for a lot of criticism, with people saying they’re overreaching, blowing up the balance sheet, risking an inflation debacle down the road,” said Stephen Oliner, a resident scholar at the American Enterprise Institute in Washington and a former senior adviser at the central bank. “They’re rallying around” Bernanke, “even if they don’t quite agree with his policy prescriptions.”
The consensus over unwinding monetary stimulus is fragile, with Fed Governor Jeremy Stein saying he “would have been comfortable with the FOMC’s beginning to taper its asset purchases” in September, even though he voted to support the decision to press on with the policy.
“Had there not been this notion of ‘we need to band together,’ he could have dissented” at the September meeting, said Oliner.
In recent years, Fed governors have closed ranks amid the financial crisis and political heat from lawmakers who opposed bailouts of failing financial institutions and who want to audit the central bank’s monetary-policy decisions.
“Recent governors have either been of similar minds when it comes to monetary policy or have been governors at critical times, when dissenting was seen as damaging to the credibility of the institutions and the effectiveness of policy,” said Roberto Perli, a partner at Cornerstone Macro LP in Washington, and a former monetary economist at the Fed.
As public debate raged, the Fed’s actions during the financial crisis were almost entirely unanimous, save for two dissents from Governor Elizabeth Duke, who retired from the central bank at the end of August.
Duke disagreed with a December 2008 decision to allow the struggling lender GMAC, then the lending arm of General Motors, to convert to a bank-holding company. She also dissented from a December 2009 decision allowing Bank of America Corp. to repay its bailout under the Troubled Asset Relief Program.
The cast of governors who will surround Yellen isn’t yet final. Two departures from the board in addition to Duke’s will leave three vacancies. Governor Sarah Bloom Raskin has been nominated to serve as deputy Treasury secretary, and Bernanke’s own departure will create an empty seat.
The Fed’s board contrasts with other financial regulators such as the Securities and Exchange Commission, where disagreement among the five commissioners is common.
“At the SEC individual commissioners get their own staff, while at the Fed, all the staff serve the chairman,” said Aaron Klein, the director of the Financial Regulatory Reform Initiative at the Bipartisan Policy Center in Washington, and a former Treasury official. “The staff analysis is driven by the chairman, and the staff are incredibly powerful.”
Under Greenspan, the most senior staff members who head the divisions of monetary affairs, research and statistics and international affairs came to be known as “the barons.” Those staff members prepare the briefing materials for all the governors before meetings.
Through a spokeswoman, Greenspan declined to comment.
Bernanke’s barons, William English at monetary affairs, David Wilcox of the research and statistics division, and Steven Kamin at international affairs, have similar pedigrees. All are Ph.D. economists from the Massachusetts Institute of Technology who have spent decades as Fed staff members.
Klein said the Fed board needs to “avoid problems of group think, where everyone is reading the same academic literature. Even if it is from different sides of the debate, everyone is trapped in the world of the same small set of academic journals.”
When Fed Governor Laurence Meyer started at the central bank, he considered asking for his own staff member, according to his 2004 book “A Term at the Fed” detailing his tenure as governor from 1996 to 2002.
“A few of the former governors had suggested that having a staff member assigned directly to me would facilitate my being an independent force on the board,” Meyer wrote. “But when I indicated I was planning to go in this direction, the senior staff persuaded me otherwise.”
This rise of the staff coincided with an era of unanimity on the board. The records document the shift.
On May 27, 1997, the Board of Governors approved an application by Southern National Corp. of Winston-Salem, North Carolina, to merge with Whiteville, North Carolina-based United Carolina Bancshares Corp. The move was one of a series of mergers and acquisitions that formed today’s BB&T Corp., the 17th largest bank holding company in the U.S.
The otherwise routine meeting is significant because it was the last dissent at a Fed Board of Governor’s meeting for more than a decade. Meyer and Fed Vice Chairman Alice Rivlin cast the negative votes.
In the years that preceded that meeting, especially from 1986 to 1993, the voting records show contentious decisions, from regulatory actions, to raising and lowering the Fed’s discount rate charged on emergency loans, to approval of the presidents and directors at the Fed’s regional reserve banks.
In November of 1992 the board voted 4-3 to approve Alfred Broaddus as Richmond Fed president, with Governors David Mullins, John LaWare and Susan Phillips voting against him. In July of 1993 LaWare and Phillips dissented against William McDonough becoming president of the New York Federal Reserve. Both Broaddus and McDonough went on to serve as presidents for about a decade.
Yellen herself was an occasional dissenter during her stint as a Fed governor from 1994 to 1997. She voted against a September 1994 decision to allow the Bank of Tokyo to establish a North American branch, and against a February 1995 decision to let Northern Trust Corp. acquire a bank in Florida.
In March 1995 she and then-vice chairman Alan Blinder voted against a report to Congress studying the impact of excess reserves. In December 1995 she joined Blinder in voting against an appointment of a director at the New York Fed. The documents don’t name the director.
In January 1995, Yellen joined three other governors in outvoting Greenspan, the only time he was on the losing side in his 18 years as chairman. The matter at hand was a formula for calculating annual percentage yields for regulations requiring banks to disclose the terms of their accounts.
Yellen left the Fed to become chairman of President Bill Clinton’s Council of Economic Advisers. When she returned to the institution as San Francisco Fed President in 2004, and then as vice chairman in 2010, she was no longer a dissenter.
As vice chairman, she led a subcommittee on the Fed’s communications policy that was able to unite two presidents with opposing views to support the same inflation and unemployment goals: Chicago Fed President Charles Evans, among the most vocal advocates for additional easing from the Fed, and Philadelphia Fed President Charles Plosser, one of the most unyielding internal opponents of Fed stimulus.
All 12 presidents voted to adopt the goals. One of the governors did not. Tarullo abstained because he “questioned the ultimate usefulness of the statement.” In January 2013 he abstained from a decision to renew the statement.
Harmony on the board “depends on both the chairman and the nature of the other governors: What they’re like as individuals, what their predilections are for working with the chairman or trying to undercut him,” said Lyle Gramley, who served on the Fed’s board from 1980 to 1985 under Volcker.
A lesson from the Volcker years was that too much dissent could be corrosive. In his last two years as chairman, Volcker ended up on the losing side of a vote at least 12 times, the Fed’s documents show.
According to Volcker’s biographer William Silber, after being outvoted in 1986 by four other governors, Volcker rose from his seat at the table and said “you can do what you want from now on, but without me,” slamming the door to his office.
Volcker was so upset that he brought a resignation letter to Treasury Secretary James Baker, though Baker declined to accept it, according to Silber.
“He was losing control of the board, that’s what he felt,” said Gramley. “You can’t be the chairman of the Fed if you’ve lost control of your board.”