Using Transparency to Combat the Appearance of Conflict of Interest at the Fed


Last month, Senator Bernie Sanders described a number of ideas for changes in the structure of the Federal Reserve in a New York Times op-ed.   These ideas were largely concerned at addressing (potential, I would say) conflicts of interest generated by the Fed’s structure.   In this post, I’ll recommend a much simpler way to address Senator Sanders’ concerns: shine a brighter public spotlight on the Board of Governors’ (already effective) oversight of Reserve Bank Presidents.   (All members of the Board of Governors are appointed by the President of the United States and confirmed by the Senate.) 


Senator Sanders’ op-ed was wide-ranging, but it paid special attention to the fact that bankers (and other private citizens) sit on the Boards of Directors of Reserve Banks.  He felt that this feature of Fed structure could create challenging conflicts of interest for Reserve Bank Presidents in the formulation of monetary policy and the supervision of financial institutions.


My main point is that the Federal Reserve Act provides a strong corrective for this exact conflict of interest.  According to the Act, a key function for the Board of Governors is to oversee the Reserve Banks and their Presidents.   This oversight takes many forms.  Perhaps most importantly, the Board of Governors must approve the appointment (and re-appointment) of all Reserve Bank Presidents.   In a similar vein, through its control of the budget process for the Federal Reserve System, the Board has the ability to set the compensation of all Reserve Bank Presidents.  


In my experience, the Board of Governors takes these responsibilities very seriously.  For example, as part of the process that led to my being appointed President of the Minneapolis Fed in 2009, I had a a one-on-one interview with each of the Governors.   These interviews were detailed explorations of how I intended to carry out my monetary policy and supervisory responsibilities.  They were pretty stressful and humbling experiences for me - in other words, they were exactly the kinds of job interviews that the public would want from its Board of Governors!  


So, in my view, the public already has an effective vehicle for oversight of local Reserve Banks and their Presidents - the Board of Governors in Washington, D. C.  


I do agree with Senator Sanders that there is room for improvement.   But I see the room for improvement in terms of enhancements to transparency, not statutory systemic change.   I’ve claimed in this post that the Board of Governors carries out its oversight responsibilities of the Bank Presidents in an effective fashion.   The Board should enhance its level of transparency so that the public is better positioned to make this judgment for itself. 


Here’s one specific suggestion along these lines: the Board of Governors should meet publicly to vote about Reserve Bank President appointments.   Such meetings would allow the public to hear the Board wrestle with the pluses and minuses of each appointment.   They would give the public a better understanding of why the Board reached its ultimate decision in each case. 


I’ll close with one last observation related to Senator Sanders’ op-ed.


In 2015, Congress amended Section 10.1 of the Federal Reserve Act to require a person with community banker experience to be on the Board of Governors.   By its very design, this legislation enhances the influence of (part of) the financial sector on the making of bank regulation and the making of monetary policy.  By its very design, it weakens the ability of the Board of Governors to mitigate many of the potential conflicts of interest that concern Senator Sanders (and many others).  


Any reasonable statutory reform agenda for the Fed would start by repealing this recent amendment to the Federal Reserve Act. 


N. Kocherlakota

Rochester, NY, January 23, 2016


Please address media enquiries and non-academic speaking requests to Monique Patenaude (monique.patenaude@rochester.edu and 585-276-3693).