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How to Make the Fed Work Better

Narayana Kocherlakota is a Bloomberg View columnist. He is a professor of economics at the University of Rochester and was president of the Federal Reserve Bank of Minneapolis from 2009 to 2015.
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The U.S. Federal Reserve is an unusual institution: It makes key policy decisions on behalf of the public, yet its constituent parts -- the 12 regional Feds -- are legally part of the private sector. In a new series of proposals, Professor Andrew Levin of Dartmouth University argues that making the regional Feds into truly public institutions is crucial to improving the Fed’s accountability, transparency and governance.

I’ve known Levin for a long time, and I have a great deal of respect for his integrity and acumen. That said, I think his aims can be achieved without such a radical reform. All it requires is some changes at Fed’s Board of Governors in Washington, D.C. -- a fully governmental entity that already oversees and has a great deal of control over the regional Feds.

Levin, for example, suggests that the process of appointing presidents at the regional Feds is too opaque. I agree, but the problem is in Washington, not in the regional banks. Currently, the six non-banker directors of the regional Fed nominate a candidate, who must then be approved by the Board of Governors. The Board is supposed to represent the interests of the public, but it’s hard to know how well it’s doing its job because it provides no information about its deliberations.

The solution is simple, and requires no change to the Federal Reserve Act. The regional Fed’s non-banker directors would offer a slate of up to three finalists. The Board of Governors would then undertake a public panel interview of each finalist, and hold a public vote to approve its preferred candidate (it could also choose nobody and ask for a new slate of candidates). In this way, the public could see how the board reached its decision.

Consider, for example, the three regional Fed presidents that the board of governors approved in 2015 (for positions in Philadelphia, Dallas and Minneapolis). All had past professional associations with Goldman Sachs -- ties that some members of the public view with deep suspicion. Under my proposed process, the public would know exactly how the board assessed these past connections, and why it decided they weren’t a problem.

Many of Levin’s other goals (which I don’t necessarily endorse) can readily be accomplished by the board of governors without any change in the law. Levin proposes a term limit for regional Fed presidents, suggests that the re-appointment process for presidents is insufficiently rigorous and argues that the regional banks should be subject to the Freedom of Information Act. The board already has the authority to make all these changes at any time.

Levin is right that the Fed should become more accountable and transparent. But that’s something the Board of Governors can achieve, simply by better aligning its oversight of the regional Feds with the public interest.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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Narayana Kocherlakota at

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