WHEN the Federal Reserve’s Open Market Committee (FOMC) decides whether to raise interest rates at the meeting starting on June 14th, representatives of the Fed’s regional branches will cast half of the ten votes. Unlike Janet Yellen, the Fed’s chair, Stanley Fischer, her deputy, or three other sitting Fed “governors”, these regional Fed “presidents” were not nominated by the White House, nor confirmed by Congress, but were elected within their respective institutions. This is not without controversy. Conspiracy theorists claim that the regional Fed banks are a “banking cartel”; more sober critics, like Hillary Clinton and Bernie Sanders, say regional Feds give commercial banks too much power. So how does it work?
Most modern economies have just one central bank, empowered by the government. That America’s central bank is more complex is the result of a series of political compromises struck in 1913, when the Fed was formed, and then again in 1935, when it was reorganised. At the time, politicians had to win over bankers who were sceptical about centralising monetary authority in Washington, DC. “The regional banks are the states and the Federal Reserve Board is the congress”, said Senator Carter Glass, one of the Fed’s architects (better known for the Glass-Steagall Act, which separated investment banking from retail banking until 1999). Commercial banks would themselves capitalise each regional Fed and appoint two-thirds of its directors. In turn, the directors would elect a president who, on a rotating basis, would assume one of five voting seats on the FOMC, which sets interest rates for the whole country. The system was designed so that the governors in Washington have a majority on the FOMC. But politicians have been getting slower at filling governor vacancies. Regional Feds’ representation has therefore been growing since Ronald Reagan’s presidency, according to a new history of the Fed by Peter Conti-Brown of the University of Pennsylvania. Today, the regional presidents match the governors for voting power, because two seats on the FOMC sit empty.
