The Federal Reserve Board of Governors has a greater say over leadership at the reserve banks than it once did. But whether that
The board has always played an oversight role for the
But sometime after the passage of the Dodd-Frank Act of 2010 — roughly around 2014 or 2015 — the board took a less passive role, one that involved regular meetings with the reserve bank search committee, and an active hand in selecting candidates and the interview process for all finalists.
"The new process, I think, is better characterized as board-reserve bank directors' co-management of the process," said former Federal Reserve Bank of Richmond President Jeffrey Lacker, who believes this heavier handed approach has eroded
Christina Parajon Skinner, a professor at the University of Pennsylvania's Wharton School of Business who researches central banking and financial regulation, said it is hard to determine the exact nature of the Board's involvement in presidential searches. But, "observationally," she said the agency's involvement seems to stretch the Board's statutory limits.
"This change in governance practice will shift the allocation of power between the Board and reserve banks that Congress originally intended in the system," Skinner said.
Other Fed historians and policy analysts are comfortable with the Board's level of engagement in presidential search processes. They note that a system in which the Board's only consultation was at the end of a search process would be inefficient, as a veto could force a reserve bank to go back to square one.
Karen Petrou, managing partner of Federal Financial Analytics, understands the Board's involvement in presidential approvals to be largely consistent with its historical approach. The only meaningful change, she said, is the Board's insistence that it review candidate pools to ensure they are "broad and diverse."
The Board has outlined its policy around its reserve bank presidential search involvement on a
Because the Fed has taken a stance that fostering diversity, equity and inclusion is important, Petrou said it is incumbent upon the Board — as the oversight entity for the entire system — to weigh in on such issues.
"If you are going to have a system wide DEI policy, then the Board really needs to play a role, because none of the individual reserve banks is in a position — other than perhaps informally — to know what the other reserve banks are doing, and you'd end up with 12 white men [as presidents], or you could," Petrou said. "Only the board has that authority to really have a sense of what each of the banks is up to."
The changing faces of the Fed
Since 2017, the Fed's collection of presidents has become
The Board says it played an indirect role in fostering this diversification.
Before he became chairman of the Federal Reserve Board in 2018, then-Gov. Jerome Powell chaired the Board's internal committee on reserve bank affairs. From that position, he oversaw what he referred to during
Yet, Powell noted that the biggest change he orchestrated was an effort to make reserve bank boards of class B and C directors — those appointed to represent interests of the general public and non-banking interest in a reserve bank district, respectively — more diverse themselves so they would, in turn, make hiring decisions that better represented their regions.
"With respect to the process of selecting reserve bank presidents, we have focused over the past seven years on ensuring that reserve bank boards reflect the communities that they serve, in terms of personal characteristics, as well as professional experience and educational background," Powell told the Senate Banking Committee during his renomination hearing in January 2022. "Research has shown that diverse hiring committees have more success in identifying and attracting diverse talent. The directors who serve on these boards play the lead role in appointing presidents and other senior reserve bank leaders."
As of 2023, 39% of class B directors and 64% of class C directors were minorities, up from 28% and 50%, respectively, in 2020, according data tracked by the Board of Governors. The share of female representation was flat for both groups across the same time frame, at 47% and 50%, respectively.
Class A directors, who are appointed by banks in each reserve district, are notably less diverse than the other two groups, but thanks to a change made by Dodd-Frank, they no longer participate in the presidential search process. Because reserve banks supervise their district member banks, having class A directors involved in presidential hiring presented an inherent conflict of interest.
The Fed's push for diverse leadership has drawn praise from some members of Congress. Sen. Bob Menendez, D-N.J., spent years calling for Latino representation either on the Board of Governors or at the helm of one of the reserve banks. With the
"After years of advocating for the Federal Reserve System to appoint an eminently qualified Latino-American as president of a Federal Reserve regional bank, they have finally listened," Menendez said in a statement following the appointment of Musalem, "whose lived and professional experiences will ensure Latinos across the nation have a voice and are more fully represented in an institution responsible for setting far-reaching monetary policy that affects all Americans."
'Diversity of views'
Yet, while the Board's more engaged approach to presidential searches has corresponded with an increase in demographic diversity, Lacker and others say it has also overlapped with a declining "diversity of views," which he believes is not coincidental.
"My conjecture is that the Board of Governors has used its more active role in presidential searches to steer reserve bank boards toward — they would call it 'mainstream candidates' — candidates with a greater affinity for the Board's policy views and a disinclination to publicly diverge from its view," Lacker said during an event at the Manhattan Institute earlier this month. "In fact, my sense is that that was the motive behind the board's greater involvement in searches."
The reserve banks themselves have raised no such issue.
The Cleveland Fed is in the middle of a search process for its next president, as its current leader
Lacker said he first took notice of the lack of dissent in 2021, when inflation flared up, causing many economists to suggest that a rate hike could be needed to cool down the economy. He said he was surprised that the decision to hold the federal funds rate at its lower bound was not only unanimous, but that so many FOMC echoed the same rationale for doing so. At the time, the committee's view was that the surge in price growth would be transitory.
"Given the controversial nature of what they were doing, given the nature of the criticism I was seeing outside the Fed of the Fed's approach, I was surprised that I wasn't hearing more from presidents on the committee," Lacker told American Banker. "Because back in 2008, 2009, and 2010, there was certainly no lack of presidents willing to speak out with a slightly different view on policy."
Now a senior affiliated scholar at George Mason University's Mercatus Center, Lacker's Fed tenure spanned 13 years. In 2012, he voted against all eight of the FOMC's monetary actions.
He resigned abruptly in 2017 amid accusations that he leaked confidential information to an analyst in 2012. Lacker denied intentionally disclosing the information in question, but admitted to violating Fed policy.
Skinner highlights the lack of dissent during 2021 in a working paper she co-authored earlier this year called "
Skinner and her co-author, Dartmouth University professor Andrew Levin — who worked as an economist and advisor for the Board of Governors for 20 years — note that a board member has not cast a dissenting vote in the FOMC since 2006. They also state that reserve bank president dissents, which were, in their estimation "not uncommon a decade ago" have since "practically vanished."
Manufacturing dissent
Greater board engagement in the presidential search process is just one factor cited by Levin and Skinner. They raise issues with the structure of the Board, which makes other governors subordinate to the chair, as well as a high turnover rate among board members.
Yet others point out that dissents come and go depending on the policy question at hand, with some decisions being less controversial than others. Petrou added that reserve bank presidents have never, by practice, been appointed with the expectation that they will be a contrarian on the FOMC. Rather, she said, individuals arrive at those positions over time.
"It's a policy decision reserve bank presidents come to as they come to it, often based on their experience as reserve bank presidents and members of the FOMC. I do not believe they are picked in any way to ensure diversity around the decision table — quite the contrary," Petrou said. "There is sometimes — and far from always, going back decades — differences of opinion on the FOMC or in other areas. It's not because of the selection process, it's because people come to things differently as they learn what they're up to."
Still, Levin said the Fed's changing tactics toward presidential oversight should not be taken lightly, adding that the implications extend beyond monetary policymaking. Levin said recent years have seen an uptick in presidents being hired with little to no direct experience with the districts in which they will serve.
"We now have multiple cases where a new Federal Reserve Bank president has been appointed who had no familiarity with the region where they were going to be the head of the regional reserve bank," he said. "These are smart people, I'm not questioning their credentials. But what I am questioning is the extent to which these don't seem to be real choices of that regional Fed and its board of directors."
Levin notes that the Federal Reserve System was designed to balance national and local interests with respect to monetary policy as well as supervision and the provision of services, adding that many of these powers are already being consolidated into the Board in Washington.
But Petrou points out that many elements of the Fed's design are antiquated — such as the fact that there are two reserve banks in Missouri and none between Dallas and San Francisco — and that the banking system has evolved in such a way that a more uniformed, nationalized approach to central banking is appropriate.
"If the Reserve Banks were allowed to determine things like payment system access, then you would have a patchwork and a lot of geographic arbitrage in which the highest risk entities would find a home with a sympathetic reserve bank," she said. "It's not a reserve bank decision that only allows you to access the payments system
