Editorial Board

Fed Should Pair Its New Openness With Governance Reform: View

In a short time, the U.S. Federal Reserve, once remote and unassailable, has become one of the nation’s most politicized federal agencies.

Republican presidential candidate Rick Perry has denounced Fed Chairman Ben S. Bernanke. Some Democrats want to reduce the influence of Fed hawks who argue for tougher action against inflation. Last year, 30 senators voted against confirming Bernanke for a second term -- the most “no” votes in history. And during the debate over the Dodd-Frank legislation, the Fed had to fight to retain its authority over state-chartered banks and fend off attempts to subject policy decisions to regular audits.

To safeguard its independence and protect its credibility, the Fed is becoming far more open, as shown by Caroline Salas Gage’s story in November’s issue of Bloomberg Markets. It now discloses its monetary-policy deliberations more swiftly. Top officials, including New York Fed President William C. Dudley, travel more, share perspectives in public speeches and hear out attendees’ concerns. Bernanke even holds news conferences.

So far, so good. But the Fed can do more. To this end, the central bank should re-examine its longtime governance structure with an eye to putting more distance between itself and the banks it oversees.

The 12 regional Fed banks currently have nine-member boards that include three bankers from those districts. It’s a conflict for these bankers to be subject to Fed supervision while also acting as a part of the Fed. Moreover, those three bankers select three other nonbankers to join them on the regional Fed boards, making it likely that the bankers will exercise a great deal of influence over their choices. Those nonbankers then have a major role, along with the Fed board of governors in Washington, in choosing their regional Fed presidents.

A better arrangement would be to fill those boards with independent directors while setting up an advisory board of bankers that could keep up a dialogue with the Fed but not have any governing authority.

U.S. Representative Barney Frank, a Massachusetts Democrat, wants to go a step further and tinker with the Federal Open Market Committee, the Fed panel that sets monetary policy. Frank wants to dislodge the heads of five regional Fed banks, including the New York Fed, from their FOMC seats.

Some regional presidents worry too much about inflation and not enough about unemployment for the congressman’s tastes. He’d rather see their seats filled with presidential nominees.

Frank’s case is weak. The FOMC has done a good job of blending regional perspectives into a coherent national policy. The majority of the panel’s seats already are held by Fed governors nominated by the president and confirmed by the Senate.

Besides, Senate confirmations have become so snarled lately that the lawmaker’s plan could result in drawn-out vacancies. The Fed should continue its campaign to make itself more accountable and push for another round of governance reforms that would rid the regional banks of conflicts -- thereby making Frank’s proposals unnecessary.