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Recess Appointment Time at the Fed

In fact, it was recess appointment time at the Fed in August 2009--if not earlier. But it is definitely recess appointment time at the Fed. This is, I think, Obama's largest and most damaging unforced errors.

Robin Harding explains the sitch:

Bleak prospects for Fed nominees: There has been plenty of comment on the ridiculously long time it is taking to fill the three vacant seats for governors at the Federal Reserve Board in Washington. The three nominees up for Senate confirmation are Janet Yellen to be vice chair plus Sarah Bloom Raskin and Peter Diamond to be governors. The prospects for getting any of these nominees through in the three week Senate session before the mid-term elections now look pretty bleak - and if so they will not be sitting at an FOMC meeting until December 14th at the earliest. Real Time Economics reports Senate Banking Committee chairman Christopher Dodd as saying: “We’ve got a limited amount of time here, I don’t know if there’s going to be any appetite to deal with these Fed nominees.”

This is what I understand to be the state of play (and Senate procedure is quite a lot harder to follow than economics):

  • Peter Diamond has to go back through the Senate Banking Committee. Mr Diamond will certainly pass out of the committee, but if the Republicans insist on holding another hearing as they appear to want to, it will take some time to schedule, hold and then vote on.

  • Mr Diamond would then join the other two nominees in awaiting a vote on the Senate floor. The Republicans will not agree to unanimous consent so time has to be made for a Senate floor debate.

  • It isn’t clear but a Republican senator may have placed a hold on the nominees (the Minority Leader’s office has not rung back to confirm this; the office of Richard Shelby, the ranking Republican on the banking committee, says that any hold is not him).

  • Holds are sometimes dropped once the senator in question has got what they wanted on an unrelated question. Otherwise, it takes a cloture vote, which requires a Senate supermajority of 60.

  • Whatever the precise cause of the delay, it’s clear that unless the Republicans drop all opposition it will take a lot of Senate time to get the nominees through, and there isn’t much time available.

The real problem with leaving those seats empty is not that the Fed cannot invoke its emergency authority: that’s a technicality that would be worked around easily enough in a crisis. It’s that it weakens the authority of the Board and hence of chairman Ben Bernanke at a time when the Fed has to make crucial decisions about whether to launch a new round of quantitative easing.

By tradition, all the Fed board members vote with the chairman, but more important than their votes is having their voices at the FOMC to counterbalance more hawkish regional Fed presidents.

Those concerns are even more acute now that Don Kohn - one of the most experienced and respected members of the FOMC and one of its few true monetary policy experts - has retired. Fortunately Janet Yellen already attends the FOMC in her capacity as president of the San Francisco Fed - but it is past time that these nominations went through.