Stanley Fischer surprised markets by announcing that he will resign his position as Vice Chair of the Federal Reserve Board of Governors as of October 13; that is more than eight months before his term expires in June 2018 and intensifies the need for the White House to make a decision regarding the fate of current Fed Chair Janet Yellen, sooner rather than later.The Board of Governors in Washington, which comprises the leadership of the Fed, currently has three vacant seats. Randy Quarles, who served at Treasury for former President George W. Bush, has been nominated for the key regulatory seat on the Board of Governors. He could be confirmed as soon as next week. It is still important to fill the other vacancies quickly to help new governors get up to speed on the Fed’s policy-making process.
Up to five seats, including the Chair and Vice Chair, will be vacant by February 1 unless replacements are nominated and confirmed by Congress. That opens the door to an unprecedented shift in leadership at the Federal Reserve, which could usher in major changes in monetary and regulatory policy. Quarles and prospective nominees for the remaining two positions, former Federal Reserve researcher Marvin Goodfriend and Indiana banker Robert Jones, are familiar with the Federal Reserve System but sympathetic to deregulating the banking industry. Quarles and Goodfriend criticized the Fed’s aggressive actions during the financial crisis and are expected to take a hawkish stance on the need for interest rate hikes as well as the Fed’s massive balance sheet. They would like to see higher rates sooner with a faster drawdown in the balance sheet than the Fed has planned, which could shock financial markets.
That said, I have seen many armchair Fed governors change their views on the course of policy once they are sitting on the Board of Governors. The Fed staff also play a key role in shaping the board’s view of the economy, especially for non-economists.
The larger issue is whether Chair Yellen will be renominated or not. The president has said he would wait until December to make a decision, which is late. Markets need time to digest a change, if it occurs. The administration’s National Economic Council (NEC) Chair Gary Cohn, formerly of Goldman Sachs, was considered the frontrunner but his criticism of the president’s messaging following the tragedy in Charlottesville put him in the dog house with his boss. The next question is whether the president would consider nominating Yellen for another four-year term. That would alleviate some of the uncertainty surrounding the course of interest rates, which could spike depending on how vocal new members of the Fed are. There is a possibility that Yellen could choose to stay on in her role as a Federal Reserve Governor. Only one Fed Chair has done that; the first Fed Chair, Marriner Eccles, stayed on in his role as a governor to counter then-President Harry Truman’s interference in the setting of monetary policy. That seems unlikely. Yellen is the last remaining member of the board to have worked throughout the entire financial crisis, although Governor Lael Brainard was involved when she was at Treasury working for Secretary Timothy Geithner. Preserving some muscle memory on the board would be prudent, especially as the Fed moves to unwind unconventional policies put in place during the crisis.