What Comes Next for the Richmond Fed?

Federal Reserve Chair Janet Yellen, center; Fed Board of Governors Vice Chair Stanley Fischer, left; and Federal Reserve Bank of New York President Bill Dudley view Grand Teton Mountain during a conference on August 26, 2016, in Jackson Hole, Wyoming.

With the abrupt resignation earlier this month of former Federal Reserve Bank of Richmond President Jeffrey Lacker, the Richmond Fed has the opportunity to step forward as a model for other regional Fed banks. The Richmond Fed had already begun the search for a new president when Lacker admitted that he discussed sensitive information with Wall Street insiders.

Choosing the next president of the Richmond Federal Reserve is an opportunity for the board of the Richmond Fed—and the Federal Reserve System as a whole—to demonstrate its progress in becoming a more transparent and representative institution. The Board of Governors of the Federal Reserve System has made strides in becoming more diverse and, over the past decade, more open, but there is work to be done on both counts. The regional Fed banks have even further to go, and it is important to ensure that these banks become more inclusive, open, and representative of their communities.

Lacker’s shocking admission underscores critical problems in the regional Fed banks’ appointment processes. The regional Federal Reserve banks are legally owned by the commercial banks they are tasked with supervising. Yet the presidents chosen by the boards of those regional Fed banks often have backgrounds in the financial industry and tend to be friendlier with Wall Street than their counterparts at the Fed’s Board of Governors. And the selection and re-appointment of regional Fed bank presidents has historically been an opaque, pro forma process. This is evidenced by the fact that the Richmond Fed’s board knew in May 2015 that “government investigators were interested in talking to Jeffrey Lacker” about leaks to Wall Street traders yet enthusiastically recommended him for re-appointment later that year. Despite knowledge of these issues, the board’s search for a successor—established by the board that re-appointed Lacker—remains in place.

An independent Federal Reserve’s interest would be best served by a new search process, one that can serve as a model for the kind of open, inclusive deliberations the Fed has signaled that it hopes to make more typical in the future. The Richmond Fed should seek a president who embodies the diverse community the regional Federal Reserve bank system is supposed to reflect—a point made by seven members of the House Financial Services Committee last week—and who firmly believes in the Fed’s core principles. Namely, the selection process should achieve five key goals:

  1. The search process should be sufficiently transparent to reassure the public that the interests of the entire Richmond Fed district are being taken into account.
  2. The committee should take every step possible to build on the success of the Atlanta Fed in selecting a qualified candidate from a background that reflects the diversity of the region.
  3. The search committee should take pains to avoid the appearance of conflicts of interest by appointing a new search committee, replacing the search firm, and ruling out candidates who have not demonstrated sufficient independence from the financial sector.
  4. The eventual candidate should be someone who understands labor market conditions for all workers in the Richmond Federal Reserve district. The candidate must support the Fed’s dual mandate of maximum employment and price stability, as well its operational independence.
  5. The candidate should recognize the distinct roles that financial regulatory policy and monetary policy play and ensure a proper role for each in supporting broad based economic growth.

The importance of demonstrating a clear commitment to a more open, representative Fed System is crucial, and this is an opportunity to signal that not only is the Fed Board of Governors moving in the right direction, but that the regional Federal Reserve banks are equally committed. The Richmond Fed’s board should proceed by engaging with the community as it moves to meet these goals. Specific actions that the Richmond Fed should adopt include, but are not limited to, the following:

  • Undertake an open search process that demonstrates the Fed’s commitment to representing the public interest: The Richmond Fed, in concert with the Fed Board of Governors, should establish a de novo search process that can serve as a model for how regional Federal Reserve banks choose their presidents in a way that is accountable to the public and free of influence from the regulated entities. The opaque process by which the current search committee and search firm were selected could call the committee’s independence into question. To avoid this, the Richmond Fed should reconstitute the search committee through a public process, without disqualifying existing members. At the very least, to reassure the public, it should immediately disclose the process by which this committee was chosen.
  • Build on the success of the Atlanta Fed in identifying a highly qualified president from a diverse background to represent the region: The Richmond Fed represents a dynamic, economically and ethnically diverse region that includes the District of Columbia, Maryland, North Carolina, South Carolina, Virginia, and West Virginia. To promote the interests of the entire region on the Federal Open Market Committee, or FOMC, the Richmond Fed president—who sits on the FOMC and votes on monetary policy on a rotating schedule—should reflect this diversity and have experience working with a wide range of communities, big and small businesses, unions, public interest organizations, and other stakeholders. It is time for someone representing workers and the public interest to come to the forefront of the search. While the region may have a deep pool of talent that matches this description, the committee should consider candidates from outside the region if they can best represent the district, as was the case in Atlanta.
  • Make concrete changes to the search process to demonstrate a clear break with the past: The Richmond Fed should make public changes to its process in order to address the appearance of conflicts of interest stemming from the fact that a search was already underway when Lacker announced his immediate resignation. In addition to demonstrating that the search committee is beyond reproach, choosing a new search firm is an important step in the This is especially important given that the current search firm, Heidrick & Struggles, was involved in the selection of one of its own board members to be the Dallas Fed president, a connection not publicly disclosed prior to the public announcement of his appointment. Finally, given the role that Lacker’s connection to financial sector insiders played in his resignation, it would be reassuring to the public if the process put forward a candidate with no financial sector associations.
  • Select a candidate who fully endorses the dual mandate and the Fed’s operational independence: The Federal Reserve’s dual mandate of maximum employment and stable prices is the most successful approach to monetary policy yet implemented. Alternatives, especially a singular focus on price stability, have fallen short of the Fed’s current approach. Price stability is important because deflation can have destabilizing macroeconomic effects and accelerating inflation can create costs that fall disproportionately on lower-income and less financially sophisticated households. However, central banks that are overly focused on price inflation have contributed to stagnation of long-term growth, greater likelihood of deflationary events, and long recessions that can change the path of growth. It is important that FOMC members carefully weigh the employment effects of monetary policy decisions.While Congress has the responsibility to set the mandate for the Federal Reserve and to oversee its implementation of that mandate through reports and congressional hearings, the day-to-day execution of monetary policy should remain with the Federal Reserve alone. The decisions that the central bank must make are complex, and it is important that FOMC members are qualified to address these matters and have the ability to put these questions before politics.
  • Choose a candidate who understands the importance of monetary policy and financial stability and prioritizes a strong economy for workers: The Fed is charged with ensuring maximum employment and stable prices, but monetary policy is also a tool of last resort to ensure financial stability. There are numerous tools, both at the Fed and elsewhere in government, to regulate the financial system and minimize the risk of credit bubbles. Like any FOMC member, the eventual nominee should ensure that monetary policy focuses on macroeconomic outcomes and is a seldom-used tool of last resort to address financial stability.

Choosing a new Richmond Fed president is an opportunity for the Federal Reserve System to publicly showcase the progress it has made in reforming itself. Critics on the left and right have pointed to the Fed as elitist and closed off from everyday Americans. There will always be limits to how open monetary policy deliberations can be, and this is a chance for the Fed to demonstrate that it knows when those limits should be applied and when they should not. An open search for the next Richmond Fed president can serve as a model for future regional Fed boards, and by selecting a highly qualified candidate who represents the diversity of the Richmond Fed’s region, the search can serve as a signal of what should be expected for future Fed presidents.

Michael Madowitz is an Economist at the Center for American Progress.