Lacker Warns Fed Governors Can Be Subject to Political Influence

  • Richmond Fed chief sees regional Feds as an important balance
  • Fed presidents dissent, while governors rarely do, he says

Federal Reserve Bank of Richmond President Jeffrey Lacker defended the U.S. central bank’s structure as important for preserving monetary policy independence from politics, warning that the Fed Board of Governors in Washington has become less insulated from partisan influence.

“The apolitical aspects of Reserve Bank governance seem especially useful given the potential for political influence on the publicly appointed parts of the Fed,” Lacker said Wednesday in the text of a speech in Huntington, West Virginia. Because governors now leave after a few years, “the composition of the Board of Governors is less insulated from the political process than was originally envisioned.”

He did not comment on monetary policy or the outlook for the U.S. economy in the text of his remarks.

Democratic presidential contenders Hillary Clinton and Bernie Sanders have both said that private bankers should be excluded from sitting on regional Fed boards, and a Republican U.S. lawmaker is pushing a bill to cut back the capital that they pay into the system.

Lacker argued the central bank’s unusual structure, which includes 12 regional Fed banks that have commercial banks as shareholders, works to generate more independent decision making and avoids group-think that could yield to short-term political influence. Voting on policy is shared among rotating Fed bank presidents and governors appointed by the president.

Governors are appointed to staggered 14-year terms, a length intended to make them independent from the political election cycle, but in practice their tenure is typically less than half that, Lacker said.

“So in practice the view of governors may not be as diverse as intended,” he said. “By the end of a president’s term in the White House, it has typically been the case that the majority or every member of the Board of Governors was appointed by a president of the same party.”

Fed Governor Lael Brainard has been criticized by Republican lawmakers for donating to Hillary Clinton’s campaign and is widely viewed as a potential Clinton pick for Treasury secretary if she wins the White House in the Nov. 8 presidential election. Kansas City Fed President Esther George has echoed that criticism, saying that Fed leaders must be sensitive to “what kind of an appearance is created with what we do.”

Lacker called political influence a “bipartisan vulnerability,” noting both Republican and Democratic presidents in earlier decades have sought to influence interest rate policies.

“There is evidence that Reserve Bank presidents are more willing than governors to challenge conventional views and that this has benefited policy making,” Lacker said. “Presidents have been more likely than governors to dissent on FOMC decisions, especially in the last several decades.”

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