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A divided, shorthanded Federal Reserve board stokes uncertainty, volatility in markets

Federal Reserve Open Markets Committee Press Conference July 31 2019 Introductory Statement

Jerome Powell, chairman of the Federal Reserve, holds a news conference July 31, 2019, in Washington, D.C., after the Fed's Open Markets Committee voted in a two-day meeting to lower its key interest rate for the first time in a decade.
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Jerome Powell, chairman of the Federal Reserve, holds a news conference July 31, 2019, in Washington, D.C., after the Fed's Open Markets Committee voted in a two-day meeting to lower its key interest rate for the first time in a decade.

It wasn’t unanimous. The Fed’s recent interest rate cut was considered unnecessary by some policy makers, and these dissenting votes stoke uncertainty and volatility in the financial markets.

On July 31, the Federal Open Market Committee decided to lower short-term, bank interest rates by one-quarter percent. According to the statement released after its two-day meeting, the federal funds rate (the interest rate banks charge each other when borrowing or lending) will now be between 2% and 2-1/4%.

The statement also says that “the labor market remains strong and that economic activity has been rising at a moderate rate.” So the economy is doing well, but this group thought some monetary stimulus was necessary.

Interestingly enough, two members of the committee voted against the move, saying they “preferred at this meeting to maintain the target range for the federal funds rate. ...”

Unfortunately, the committee is currently shorthanded. By constitution and charter, the Board of Governors should have seven members. Two seats are empty. Governors are nominated by the president and confirmed by the Senate for a full term, which is 14 years.

Peter Crabb.jpg
Peter Crabb

Some have argued that the FOMC succumbed to pressure from the president. But all this talk is a distraction from the real need: more board members. The FOMC has been working for years now with less input than the rules authorize.

The FOMC is chaired by Jerome H. Powell and consists of 12 members: the seven governors; the president of the Federal Reserve Bank of New York; and four of the remaining 11 Reserve Bank presidents from around the country, who serve one-year terms on a rotating basis. The committee meets eight times a year, or as needed.

Since there are currently only five governors, the FOMC is missing two opportunities for valuable contributions related to the state of the economy and the appropriate level of interest rates. The current uncertainty creates too much volatility in the financial markets.

The president and the Senate must do their part to reduce this uncertainty by filling the board seats.

Peter Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. pcrabb@nnu.edu

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