Governing the Federal Reserve System after the Dodd-Frank Act
10 Pages Posted: 10 Jan 2014
Date Written: October 31, 2013
The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act increased the powers of the Board of Governors of the Federal Reserve System along almost all dimensions pertaining to the supervision and operation of systemically important financial institutions. With Ben S. Bernanke’s term as Fed chair ending in January 2014, much of the public’s attention has focused appropriately on the identity, views, and experience of candidates for the successor, whose influence on bank regulation will be considerable. President Barack Obama’s selection and the Senate’s confirmation of current Board vice chair Janet L. Yellen as chair comes at the end of a long public debate on this nomination.
By statute, however, the chair decides almost nothing herself: The Federal Reserve System is supervised by a Board of seven presidentially appointed, Senate-confirmed governors, of whom the chair is but one. In practice, the chair has frequently had a disproportionate influence on the monetary policy agenda and also the potential to predominate on regulatory matters - working closely with the Fed Board’s senior staff. Even so, for the most significant decisions, the Board must vote, and the chair must rely on the votes of the other six governors (for Board matters) and in addition, on a rotating basis, the votes of five of the twelve Reserve Bank presidents (for monetary policy). On regulation and supervision issues, the chair can do little of consequence without the support of at least three other governors.
This Policy Brief, published by the Peterson Institute for International Economics, focuses on the powers and responsibilities of the Board following Dodd-Frank and argues in favor of changing the process of considering and choosing the Board’s governors. In nominating and confirming new governors, the president and Congress should make greater efforts to appoint only highly qualified people familiar with both regulatory and monetary matters. They should ensure that governors of the Fed can work effectively with staff and engage on an equal basis with the chair. An appropriate aspirational analogy is to the justices of the Supreme Court: Although one among them is chief, with particular duties and recognition, each justice must answer for the exercise of her duties, and each is subject to public engagement and scrutiny at the appointment process and beyond.
Keywords: Federal Reserve System, financial regulation, Dodd Frank Act, Too Big To Fail, appointments process
JEL Classification: E40, E5, E58, H1, K2, K23, K22, N2
Suggested Citation: Suggested Citation