With the news that President Trump decided to break decades of tradition in failing to reappoint Janet Yellen, the question now turns to Yellen’s post-Chair fate. Quirks in the governance of the Federal Reserve I’ll describe in a moment mean that her options aren’t just about retirement: although unusual, Yellen could stay at the Fed until 2024. In this post, I’ll lay out my argument for why Yellen should do this, why the Fed will be better for it, and why changing this norm would be an unmitigated good for Fed governance.
The Fed has four leadership positions: The Chair of the Board of Governors, the Vice Chair for the Board of Governors, the Vice Chair of the Federal Open Market Committee, and the Vice Chair for Supervision. (There are actually five leadership positions, since the Chairs of the Board and FOMC don’t have to be the same person; they are by tradition). The Vice Chair of the FOMC is, by tradition, the president of the Federal Reserve Bank of New York. The other leadership positions are occupied by sitting Governors of the Washington, DC-based Board of Governors.
The quirk is Governor-leaders serve two concurrent terms, one as Governor and the other in Fed leadership. Fed leadership terms are for four years and require presidential reappointment. Governors serve for nonrenewable fourteen-year terms, unless serving the residual term of a predecessor. (For more on the sticky wicket that the President and Senate have created for the current Vice Chair for Supervision, Randal Quarles, see here.)
What happens, then, when the leadership term isn’t renewed by the Governor’s term still continues? Historically, former Fed leaders have given the President a courtesy resignation, with only minor, transition-related exceptions. There is nothing in the statute that requires it. Perhaps the thought is that the new Fed Chair needs a fresh start without the shadow of previous leadership looming.
Whatever the reason, we haven’t seen a former Fed Chair stay at the Board of Governors since Marriner Eccles was passed over by Harry Truman in 1948 but stayed nonetheless until a climactic end in 1951. (For more of that climax, you’ll have to buy my book.)
Relying on a hoary precedent from the early Cold War seems foolish, but I’m not so sure we have the robust historical precedent that this practice might suggest. After Eccles, William McChesney Martin Jr served for almost twenty years. When he finally resigned as Fed Chair, it was for the opposite reason we see with Yellen: there was no more space in his Fed Governor dance card, even though he had another year left in his last four-year term as Fed Chair.
His successor, Arthur Burns, thought about staying at the Fed, but decided against it. I’m still trying to get a handle on why this was. Paul Volcker didn’t consider staying at all–his time in public service had depleted him financially and he had personal family health concerns that required a bigger paycheck. Alan Greenspan was, like Martin, termed out after 20 years. And Ben Bernanke, I think, didn’t consider it (although Ben, if you’re reading, I hope you’ll correct me if I’m wrong).
In other words, I’m just not so sure the norm of Governor resignation is as strong as it seems.
Even if it is, now is the time to change the norm. The Fed is facing a governance crisis with the mounting vacancies, as I’ve described elsewhere. There is only one nomination pending, that of Randal Quarles whose short term is already expiring in January. The Trump Administration has shown little interest in filling these vacancies. If Yellen resigns before the Administration and Senate move, the Fed’s Board of Governors will have four vacancies for the first time in its history.
Now, Senate Republicans have shown such hostility for the Yellen Fed that they might be motivated to move on these vacancies, assuming Trump makes nominations. But even if we see new, high-quality nominations, I still think Yellen should stay. Janet Yellen is the single most experienced central banker in US and, I’d argue, global history. To lose those insights at a time of high-stakes transitions with respect to the Fed’s balance sheet, regulatory and supervisory duties, monetary policy puzzles like undershooting inflation targets, and more, could be an unnecessary wound.
As the Wall Street Journal’s Nick Timiraos noted recently, we’re in an unprecedented season of leadership turnover at the Fed, with the loss of Stanley Fischer as Vice Chair and the announced departure of William Dudley as president of the Federal Reserve Bank of New York (and Vice Chair of the FOMC). Add to that list Yellen’s departure and the sheer loss of institutional memory could do much more damage than we have anticipated.
In short: Dr. Yellen, please stay. The country needs you now more than ever.