Does the New Fed Governor Serve at the Pleasure of the President?

by Peter Conti-Brown — Tuesday, Oct. 17, 2017

President Trump and the Senate got within a few days of having four vacancies on the Fed’s Board of Governors, an ignominious milestone that has never occurred in the Fed’s history. I wrote recently in the Wall Street Journal that these vacancies–whether we have four or three or two–are deeply problematic for the Fed. First, the Fed can’t accomplish all of the tasks Congress has delegated to it with vacancies. Second, and far more importantly, the public can’t exercise accountability using one of the only mechanisms available to it when it comes to Fed oversight. While administrative law scholars like Anne Joseph O’Connell have long shined a light on myths and realities about administrative vacancies, there’s something unusual, perhaps unique, about the trend at the Fed.

I was therefore very pleased to see the confirmation of Randal Quarles (of Utah? Or Colorado?) as Fed Governor and, separately, as Vice Chair for Supervision, a position created by Dodd-Frank but formally unfilled since 2010. Normally, the position of Fed Governor is for fourteen years and is explicitly protected against peremptory firing by the President. Fourteen-year terms expire on February 1 on even years, following the regulatory implementation of a statutory design that “provide[d] for the expiration of the term of not more than one member [of the Board] in any two-year period.” 12 USC 242. That is, the President is supposed to get no more than two appointments per term to ensure the Fed’s insulation from presidential meddling.

This statutory scheme works in theory, but not in practice, as I have discussed at length elsewhere, since Fed Governors don’t stay put for the full fourteen years and therefore give new presidents a run at the Fed after each election.

But whatever its limitations, the idea that Fed Governors aren’t subject to the same presidential (dis)pleasure as White House staff is a tremendously valuable one, and not just during times of relative personnel instability in the Oval Office. If Fed Governors, including the Chair, are immediately fireable for any or no reason, then decisions about rates of interest and the availability of credit can and will become issues of partisan intensity. Indeed, the entire point of the Fed’s institutional design is to reduce that likelihood, in appearance and in fact.

I’ve buried the lede here, but all of this background is important because I think the Senate and to a lesser extent the President have bungled this process and stripped Governor Quarles of the protection that Congress has given the role. Today, Governor Quarles looks an awful lot like someone dependent on the President for his immediately continued service as a central banker.

The quirk is this. Governor Quarles was nominated to fill not two, but three vacancies. The first two I’ve mentioned: Vice Chair for Supervision and Fed Governor. But the second was only for the balance of a term unfilled by a predecessor set to expire on January 31, 2018, in just three months. Recognizing this imbalance, President Trump also nominated Quarles for a third position: Fed Governor for a full fourteen-year term beginning February 1, 2018, and ending in 2032. (That we’re talking about the science-fictional sounding 2030s gives you a sense of the importance Congress attached to separating the Fed from partisan politics.)

If I had been advising the President or his staff, I would have strongly discouraged them from using Quarles to fill a stub term of three months. There are other stub terms of two, four, and six years still pending at the Board. There is nothing that I can see in the Federal Reserve Act that requires vacancies to be filled in any kind of order of priority (although if readers see the relevant language, I’d welcome pointers to that end). But if that advice were ignored, I would have strongly recommended that the Senate act on all three nominations simultaneously. Alternatively, the President could have–indeed, should have–nominated a full slate of Governors to eliminate the problem of vacancies at all. In that case, he could’ve made Quarles one of the other Governors or waited until January to install him as Governor and Vice Chair alike.

The consequence today is that our current Vice Chair for Supervision–one of the most important positions in the administrative state for financial regulation–does not have a term of four years, as statute and his online biography suggest, nor does the newest Fed Governor have an insulated, tenure-protected term of fourteen years. Both positions expire on January 31.

It is true that the statute permits Fed Governors to remain in place until a successor is named, including if the Governor becomes her own successor. 12 USC 242. There is no expiration date on these holdovers. But the functional consequence is that a Governor sitting in a stub term is not entitled to the term protection Congress wrote into the Federal Reserve Act. If Governor Quarles made a decision that the President didn’t like, on monetary or regulatory policy, the President could make a new appointment and immediately turn Quarles into a lame duck.

How did this occur? I’m near certain this isn’t a Machiavellian White House trying to deconstruct Fed independence. I doubt very much anyone at the White House thought very hard about the arcane structure of Fed appointments. The answer is either Republican incompetence at advancing these nominations or Democratic obstruction in preventing them, or maybe a bit of both. As a Democrat, I hope it’s the first, but fear it is the second.

However we arrived at this problematic situation, the ball is in the Senate’s court. Quarles won confirmation with the support of 65 Senators. If I were a Democratic Senator, I would have joined that near supermajority. But whether a Senator voted for or against him, the middle ground we now occupy is a dangerous one. I hope the Senate moves quickly to resolve this untenable situation and that Governor Quarles can occupy his seat with the same protections his colleagues at the Board already enjoy. The present alternative is a boon to the Trump Administration and a threat to the Fed, a situation I doubt the Administration’s critics would prefer.

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About Peter Conti-Brown

Conti-Brown is an assistant professor at The Wharton School of the University of Pennsylvania. A historian and a legal scholar, Conti-Brown focuses on central banking, financial regulation, and public finance.

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