Bush administration to put its stamp on central bank

When the legislation creating the Federal Reserve System was under consideration in 1913, the American Bankers Association, holding its annual convention in Boston, passed a series of resolutions denouncing the bill as socialistic, confiscatory, unjust, un-American, and generally wretched.

A "communistic idea," charged a San Antonio banker.

President Woodrow Wilson won the legislative battle for his bill. The Fed was created.

Today, bankers and most others would consider it weird if the United States lacked a central bank. It is a prized institution, recognized for its importance to the economy.

Eighty-plus years later, President Bush has an unusual opportunity to shape policy at the Fed, the world's most powerful financial institution. Mr. Bush will be able to name at least five of seven governors in his term in office. The governors, plus five presidents of the 12 regional Fed branches, make up the voting members of the Fed's policymaking body, its Federal Open Market Committee (FOMC).

Often the Fed's monetary policy and its influence on the prosperity of the nation has an impact on whether a president gets reelected. The first President Bush figures the Fed cost him his reelection. The economy was sluggish when voters went to the polls in 1992. George W. undoubtedly will hope for a sympathetic Fed four years hence.

And the Fed is not just important at election time. Fed watcher Thomas Schlesinger notes: "The real and implied judgments, prejudices, and actions of financial markets and central banks shape elected leaders' decisions about taxes, spending, regulation, and development models."

Wall Street especially will watch closely whom President Bush nominates for the Fed.

There have been two vacancies on the seven-member board of governors since July 1999. Bush already has reappointed vice-chairman Roger Ferguson.

On Friday, Bush nominated Susan Bies, executive vice president of the First Tennessee National Corp. to fill one of the two openings. If confirmed by the Senate, she would be the only woman on the board.

Earlier last week, Edward Kelley, the Fed's longest-serving governor, announced his intention to resign after an additional Fed governor has been appointed and confirmed.

The term of Gov. Laurence Meyer expires next January. The White House also must decide whether to reappoint or replace Alan Greenspan when his term as chairman ends in 2004.

Fed governors do not have the same impact on economic policy as Supreme Court justices have on law.

"Supreme Court justices have much more influence over what they do than Federal Reserve Board governors have over what they do," notes Allan Meltzer, an economist at Carnegie-Mellon University in Pittsburgh.

That's because the Fed is traditionally dominated by its chairman. Most often, Fed policymakers go along with the chairman's view in their votes.

Occasionally, a governor or two casts a dissenting vote. But it is extremely unusual for a majority or even a large bloc of the FOMC to take a policy stand contrary to that of the chairman, though it did happen once when Paul Volcker was chairman and Ronald Reagan president.

In the Supreme Court, the majority often takes a stand opposite to the Chief Justice.

Nonetheless, individual governors can have some weight. Fed chairmen can be influenced by what FOMC members think and say inside and outside policy sessions.

Mr. Schlesinger, director of the Financial Markets Center in Philomont, Va., would like to see differences in the FOMC on economic and regulatory matters spelled out more clearly in the minutes of that body. The FOMC meets behind closed doors.

"The public at large would benefit," he says.

Schlesinger also urges Bush to appoint a more diverse group of governors. The Fed in recent years has been dominated by economists. Mr. Kelley, a manufacturing executive, and Mr. Ferguson, a banking consultant, are exceptions to this pattern.

Ms. Bies is a banker. When President Clinton tried to appoint Felix Rohatyn and Alicia Munnell - a banker and an economist slightly out of the mainstream - the Republican-led Senate blocked them. His subsequent appointments to the Fed were noncontroversial.

Economists view Bies as a mainstream selection. What seems clear is that Bush will not name to the Fed a stern anti-inflationist who cares little about unemployment levels.

And that view will have the support of Democrats who now control the Senate.

(c) Copyright 2001. The Christian Science Monitor