How the Next President will get to Re-Shape The FED

 

(April 2012) The next President may appoint 3 new Federal Reserve Governors, a huge responsibility that will heavily affect the economy and the markets for years to come.

In the more immediate term, whoever the next President appoints to the FED will play a major role in determining when, and at what pace, the FED will increase the FED Funds rate.

 

A Romney Presidency Should Equal a More Hawkish FED

If Mitt Romney is elected President, his appointments to the Federal Reserve Board will likely be far more hawkish than Obama’s.  Two of his leading economic advisers, Glenn Hubbard and Greg Mankiw are both seen as hawks. Mr. Mankiw wrote an academic paper in 2001 which laid out a formula for an ideal fed funds rate.  According to RBS, his formula would indicate that the Fed Funds rate should rise to 0.8% by the end of 2014. This would be an increase of ⅔ percent from the current target of 0.0 to 0.25%.

The Federal Reserve Board does not directly set the FED Funds rate, however each of the 7 governors also has a seat on the 12 member Federal Open Market Committee (FOMC) which does.  The other 5 FOMC members are the President of New York FED, who has a permanent seat, and 4 of the 11 remaining regional Federal Reserve Board Presidents who rotate on an annual basis.

The current group of FOMC members serving in 2012 could be categorized as a very dovish group. In 2013 however both the most hawkish (Jeffrey Lacker) and dovish (Sandra Pianalto) will be leaving the FOMC, as the regional presidents rotate.  They will however be replaced by members which share their views. The incoming President of the Chicago FED Charles Evans is a dove, while Esther George is assumed to be a major hawk. The wild-card in 2013 might be James Bullard, the President of the St. Louis FED. He has supported recent efforts to push down-long term interest rates (Operation Twist), but he opposed the FOMC saying how long it expected to keep interest rates low.

Into this environment, the newly elected  President will get to appoint members to the Federal Reserve Board. However, those nominations must be approved by the Senate. President Obama has in fact nominated two individuals to be FED Governors, Jeremy Stein and Jerome Powell, however these nominations have not been approved by the Senate. The Republican controlled Senate is delaying approving the nominations, in hopes that a Republican president will get to fill these key positions. However, they would also need 60 Republican members of the Senate to get the nominations approved (in the case Democrats decided to filibuster). So while the next President might get to nominate Federal Reserve Governors, its not assured if they will be quickly approved. The last time that the Federal Board had no vacancies was 2006.

 

Who is on the FOMC right now (2012)?

9 Doves, 1 Hawk

Ben S. Bernanke, Board of Governors, Chairman (Dove)
William C. Dudley, New York, Vice Chairman (Dove)
Elizabeth A. Duke, Board of Governors  (Dove) (expired term)
Jeffrey M. Lacker, Richmond (Hawk)
Dennis P. Lockhart, Atlanta (Dove)
Sandra Pianalto, Cleveland (Dove)
Sarah Bloom Raskin, Board of Governors (Dove)
Daniel K. Tarullo, Board of Governors (Dove)
John C. Williams, San Francisco (Dove)
Janet L. Yellen, Board of Governors (Dove)

Who will be on the FOMC in 2013

Ben S. Bernanke, Board of Governors, Chairman (Dove)
William C. Dudley, New York, Vice Chairman (Dove)
Elizabeth A. Duke, Board of Governors  (Dove) (expired term)
John C. Williams, San Francisco (Dove)
Janet L. Yellen, Board of Governors (Dove)
James Bullard, St. Louis (Centrist)
Charles L. Evans, Chicago (Dove)
Esther George, Kansas City (Hawk)
Eric S. Rosengren, Boston (Dove)

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