Chair Yellen Resigns

To no one’s surprise, Chair Yellen has announced her intention to resign effective upon the swearing in of her successor, Jerome Powell. Since Governor Powell’s confirmation hearing is set for November 28 of this year, it is possible for him to be confirmed and sworn in before the January 30–31, 2018, initial FOMC meeting, meaning that there could be only three sitting board members at that meeting. While most of the commentary between now and then will likely focus on Chair Yellen’s legacy, more relevant going forward are the implications of her leaving and the effects that efforts to fill the vacancies will have on policy during 2018.

The prospects are slim that any of the four vacancies can or will be filled in the very near future, perhaps not even as soon as mid-2018. First, there is the new requirement that was included in the reauthorization of the Terrorism Risk Insurance Act in 2014 requiring at least one board member to have supervisory or work experience in a community bank with assets of less than $10 billion. According to the WSJ, since the Trump administration has taken office, at least three potential candidates for this seat have actually turned down the position or withdrawn themselves from consideration because of financial divestiture or related requirements.1 This requirement is likely to take time to find an appropriate person; but once filled, that person, because of his or her background and work experience, is not likely to be major contributor to monetary policy and is more likely to focus instead on regulatory issues in cooperation with Vice Chairman Quarles.

As for the other vacancies, numerous names have been floated, but none have as yet been advanced. Who is chosen and what their backgrounds are will critically determine the path of policy. Once Chair Yellen is gone, there will be only one PhD economist, Lael Brainard, on the Board. We have written before that the dearth of economists on the board will put more emphasis on the board staffs’ recommendations, since the staff run the models for the Greenbook and prepare the policy options discussions in the Bluebook. The lack of a deep background in economics, econometrics, and the nuances of economic modeling will be a big disadvantage for the new Chair and non-economist appointees. In the case of the chair, the last three recent Fed chairs have all been economists.