WASHINGTON – Federal Reserve governor Jeremy C. Stein is chairman both of the internal committee that monitors financial markets for signs of trouble and of the committee that watches the way banks treat their customers.
He is also the only remaining member of those committees.
Stein has said that he will step down from the Fed on May 28.
A string of departures from the Fed’s seven-member board in the past year has left the central bank on the verge of operating with just three governors for the first time in its 100-year history. Three nominees are awaiting Senate confirmation, but so are scores of nominees to other offices, and Senate Democrats say there is a real chance no vote will be held before Stein departs.
The dwindling of its board is straining the Fed’s ability to manage its complex responsibilities, which extend well beyond its enormous economic stimulus campaign and its lead role in the overhaul of financial regulation.
It is also shifting the balance of power on the Fed’s most important group, known as the Federal Open Market Committee, which sets monetary policy. The March and April meetings of that committee – which includes board members and presidents of the 12 regional reserve banks – represented just the third and fourth times that a majority of the votes were cast by the regional presidents, who are allocated five votes on the committee on a rotating basis.
Unlike the members of the Fed’s board, who are presidential appointees, those officials are selected by business leaders in each district and are not subject to Senate confirmation.
The depletion of the Fed’s board is a relatively new phenomenon.
President Franklin D. Roosevelt nominated six men to the newly created Federal Reserve Board on a Monday morning in January 1936. The Senate confirmed all six Thursday, just four days later, and they took office Saturday.
For the next half-century, the Fed was rarely short-handed. Replacements for departing governors were named and confirmed with little fuss.
In the past two decades, however, the Fed has had a full complement of governors less than 40 percent of the time. Since the beginning of the financial crisis, the Fed has operated primarily with just five governors.
Randall S. Kroszner, who served on the board from 2006 to 2009, was one of five governors during most of that time, a situation he described as difficult but manageable, even during the heart of the financial crisis. He said, however, that anything less than that would be difficult.
“When you get down to four or fewer, it’s difficult to get the work done,” said Kroszner, an economics professor at the University of Chicago. “There’s an enormous amount going on – on the regulatory side, monitoring the markets, the impact of QE and the tapering – and it takes a lot of time and focus,” referring to quantitative easing, or the Fed’s bond-buying program.
Frederic Mishkin, a board member from 2006 to 2008, said the absence of a vice chairman was particularly problematic for the Fed’s chairwoman, Janet L. Yellen, because some tasks could not be delegated to other board members.
“The chair has to have time to think about what’s going on,” said Mishkin, a professor of economics at Columbia University. “There’s a lot of administrative stuff that either the chair or the vice chair needs to be in charge of. And if there’s no vice chair, that means the chair is going to have less time to figure out the best policy. And that can be very costly.”
The board manages its affairs through six committees. In normal times, each of the governors leads one committee and sits on some others. Yellen does not sit on the committees.