The Regional Representation of Federal Reserve Bank Presidents
Gildea, John A., Journal of Money, Credit & Banking
AN ONGOING DEBATE WITH POPULIST OVERTONES has recently culminated in a number of lawsuits being filed questioning the constitutionality of having Federal Reserve Bank presidents serve on the Federal Open Market Committee (FOMC).(1) The major contention of these lawsuits is that District Bank presidents should not be eligible to vote on monetary policy issues that affect the entire country because they have not been appointed or approved by the President or the Senate. The goal of this litigation would be to diminish the influence regional Reserve Banks have on monetary policymaking and to further concentrate the monetary policymaking authority in the central-government-appointed and -approved Board of Governors.
While many believe that lawsuits of this type have little chance of succeeding, it is interesting to note that the implicit belief in these lawsuits is that Federal Reserve Bank presidents play an important role in shaping monetary policy. Exactly what this role is, however, goes unmentioned. Previous research documenting the conservative preferences of Bank presidents seemingly has resulted in the fear that credit market conditions are being manipulated by privately controlled, tight money regional Reserve Banks (see Puckett 1984, Woolley 1984, Belden 1989, Gildea 1990, and Havrilesky and Schweitzer 1990). The debate continues today, despite the fact that there have been only seven FOMC meetings in the last twenty-eight years when the majority of voting presidents differed from the decision of the majority of the Board of Governors.
The purpose of this paper is to attempt to shed some more light on the voting behavior of Federal Reserve Bank presidents. Besides their more conservative preferences are there other factors that might influence their voting behavior? Specifically, do the District Bank presidents display any regional representation in the FOMC policymaking process? If so, this would further substantiate a voting pattern that is independent of the Board of Governors. It would also place the critics of current FOMC structure in opposition to a democratically responsive monetary policymaking framework that was intended by the creators of the original Federal Reserve Act. And given the growing number of split decisions amongst the Board of Governors, who constitute a 7 -- 5 majority, it might also provide greater insight into those meetings when Bank president are able to define the majority FOMC opinion.(2)
THE INDEPENDENT POLICY PREFERENCES OF RESERVE BANK PRESIDENTS
Many students of monetary policy are convinced of the dominance of the Board of Governors, particularly the chairman, in the FOMC policymaking process. Kettl (1986, p. 13) writes that "the Fed's power has depended on the chairman's leadership: on his ability to deal with the Fed's external environment, to help the Fed adapt to changing economic circumstances, technical uncertainties, and political demands." Evidence of the chairman's never being on the losing side of an FOMC policy debate, of the chairman's implementing a different open market policy directive on his own accord (Greider 1987, p. 640), and of a governor's and a president's describing the deference Reserve Bank presidents display toward Board members (Reich 1984, p. 115, and Greider 1987, p. 205) gives credence to this belief.
In apparent contrast to this view, however, is evidence of the independent nature of Reserve Bank presidents. Numerous presidents are on record stating that they have the issues fairly well defined before arriving in Washington, do not caucus with other members the night before an FOMC meeting (Reich 1984, p. 98), and are not arm- twisted during the meetings (U.S. Congress, House, Hearings, The Federal Reserve System after Fifty Years, 1964). This testimony, whether it disputes the dominant chairman hypothesis or simply reflects conflict within the system, provides support for the notion that the independent policy preferences of Federal Reserve Bank presidents are revealed by their FOMC voting behavior. …