Vice-Chairman Fischer resigned this morning, effective mid-October. As such, there will be four vacancies on the Board of Governors come mid-October unless Randal Quarles (link), the nominee for Vice Chair of Supervision, is confirmed by the Senate before then, which we believe is almost certain. We have written extensively on the likely composition of the Federal Reserve Board (and by extension the FOMC) since President Trump took office (link).
Implications for Fed Chair Nominations
The first question that comes to mind is whether Yellen would be more or less disposed to stay on as Fed Chair as a result of Fischer’s earlier-than-expected departure. On the one hand, Yellen might be more inclined to stay to preserve what little continuity is left once Fischer leaves, as a matter of institutional loyalty. On the other hand, Fischer’s departure gives the Administration an earlier opportunity to reshape the Fed, which might encourage Yellen not to seek or accept an additional term as Chair. In any case, we have not changed our view that it is unlikely that Yellen will remain as Chair–based importantly on our expectation that Yellen would not accept renomination if offered it.
After Fischer leaves, and if Quarles is not on board by then (no pun intended), regional Fed presidents would outnumber governors on the FOMC by five to three. Most likely, Quarles will be on board by then, so it would only be five to four. The framers of the Federal Reserve Act would not be happy. But presidents would be very wary of altering the decisions that the three governors supported.
Yellen will likely remain on the Federal Reserve Board and, in effect, as Chair until her successor is confirmed, even though the nominee seeking confirmation could be a sitting Board member at that time. She is more likely to remain as a governor, even if just for a while if her immediate departure would mean there would only be three governors. This would likely speed up the nomination and confirmation process. It is possible that Yellen staying on temporarily would lead to an earlier nomination and confirmation of Goodfriend. Also, the decision on the community-banker governor nomination would come more quickly. It would also move up the timetable for nominating the next Chair, to facilitate the new Chair being on board immediately after Yellen’s term as Chair ends.
But, for now, Yellen remains in control. One risk is that now, with Fischer gone, if the incoming Chair is relatively less experienced (Cohn, for example), there could be more disagreement on the FOMC.
December Meeting: Implications for a Hike
At the margin, Fischer’s absence at the December meeting might mean slightly less support for a December rate hike than otherwise. We have long seen Fischer as part of the consensus in the center, to be sure, but with a slightly hawkish tilt when compared with, say, Yellen or Dudley. However, his absence will not change the basic calculus for that meeting. The decision will reflect what the Committee sees as the underlying rate of inflation at that point and its confidence in that estimate, which is still to be determined based on the incoming data between now and then (see What Will It Take to Raise Rates in December?). And, of course,
Quarles will almost surely be a member of the FOMC by then, and he is likely to be a bit more hawkish than Fischer–though we don’t see Quarles as likely to impact monetary policy in the near term.
September Meeting: No Change to Reinvestment Plans
Traditionally, many governors have skipped the last scheduled FOMC meeting of their tenure. But it is merely a tradition. Governor Tarullo chose to attend his last policy meeting in March 2017 even though his resignation was effective in early April. Whether or not Fischer attends the September meeting will have no impact on the decision to announce a change in reinvestment policy, which we see as all but certain. Fischer’s absence, however, would mean his views wouldn’t be reflected in the September rate projections. We viewed his dot in June as likely consistent with three moves in 2017 (see Naming the 2017 and 2018 Dots from the June Meeting). We will offer our expectations for the September dots soon.
Nomination for New Vice Chairman
The nominee for Vice Chairman of the Board will be chosen by President Trump from sitting Federal Reserve Board members and confirmed by the Senate.
Trump has the option of naming someone who is already is a governor (Governor Powell or Governor Brainard). Donald Kohn and Roger Ferguson are recent examples of sitting governors being named and confirmed to this position. However, naming a current Governor would not waive the requirement for Senate confirmation.
If Trump opts to name a Vice-Chairman from the current roster of governors, Trump would pick Powell, not Brainard. Powell is a Republican; Brainard is a Democrat. Furthermore, Powell fits the mold of what the Trump Administration would likely seek in a Vice-Chairman: plenty of real-world experience in financial markets and economic policy, and not necessarily an academic.
Quorum of the Fed: Operational Problems with Only Three Governors
For many regulatory functions, it is the Federal Reserve Board that decides policy, not the FOMC. If Quarles is not confirmed as Vice Chairman for Supervision Quarles by the time Fischer departs, the Board will have only three governors–for the first time since 1936.
From an operational perspective, having only three governors is extremely problematic. If there are only three governors, then the Fed’s quorum rules and government disclosure laws mandate that any two governors would not be permitted to discuss policy without announcing the meeting to the public in advance. Were the Board to only have three members for some time, the burden on the serving governors, given their committee assignments and other responsibilities, would become very serious. But Quarles will almost surely be confirmed before Fischer leaves.
Fischer’s Current Assignments at the Fed
In addition to his role as Vice Chairman of the Board, Fischer also chairs numerous Board committees that are focused on specific policy matters. He currently chairs the “Committee on Economic and Financial Monitoring and Research” and the “Committee on Financial Stability.” In both cases, Brainard is the other member. Fischer is also a member of the “Committee on Consumer and Community Affairs” and “Committee on Board Affairs.” With many changes ahead for the Board, including a new Chair, all Board committee assignments and chairs will be up for consideration.