Stanley Fischer, vice chairman of the Federal Reserve and member of the Fed’s seven-person Board of Governors, submitted his resignation on Sept. 6, 2017. He has been a member of the Board since 2014. In his resignation letter, Fischer cited personal reasons to step down from the board next month, either on or close to Oct. 13. Fischer’s departure increases the number of vacant seats on the Fed’s Board of Governors to a total of four. A Massachusetts Institute of Technology trained economist and professor, Fischer is credited with training former Fed Chairman Ben Bernanke and current European Central Bank President Mario Draghi, two of the most influential central bankers of our time. Fischer has also served as a professor at University of Chicago, taught economics at MIT, served as the chief economist for the World Bank, deputy managing director at International Monetary Fund, vice chairman at Citigroup and was a governor of the Bank of Israel for eight years before being appointed to the Fed by former President Barack Obama.
President Donald Trump told The Wall Street Journal in July that he was considering National Economic Council Director Gary Cohn as a successor to Fed Chair Janet Yellen, whose term is set to expire in February 2018. Last year, Yellen expressed her intention to serve her tenure and even hinted at her desire to be reappointed. The Wall Street Journal reports that Cohn’s chances have dropped after he criticized Trump’s response to Charlottesville. Last month, The Washington Post reported that Cohn complained loudly about Trump while dining with friends at a Long Island restaurant.
The Fed is the central banking system of the United States, comprising three main entities: the Board of Governors, the Federal Open Market Committee and the Federal Reserve System, which includes the Fed in Washington and 12 regional Fed banks.
The Board of Governors is the most important entity, as it provides guidance for the Fed and oversees the 12 Federal Reserve Banks.
The Board’s seven members also serve on the 12-member FOMC, the entity that sets monetary policy and is responsible for open market operations, a process that influences the federal funds rate. This member majority gives the Board of Governors the ability to shape the policy decisions of the FOMC.
Fischer’s resignation comes at a critical time for the Federal Reserve. The Fed is considering raising the interest rate again, after raising it 1 percent following a prolonged near-zero interest rate policy in effect since the 2008 financial crisis. The Fed also wants to lessen its $4.5 trillion balance sheet, which increased five times since the beginning of 2007.
A main culprit of the 2008 financial crisis was access to cheap money, a loan or credit with a low interest rate. The Federal Reserve facilitated cheap access to funds and encouraged risk-taking among borrowers in an attempt to promote investments and increase the level of employment.
While the Fed has succeeded in increasing the official employment rate, known as U3, it has fallen short of its inflation target, which has remained low since the 2008 financial crisis.
As a result of the 2008 financial crisis, the Fed put the unconventional monetary policy of quantitative easing into effect, which has been widely criticized in recent years. Quantitative easing occurs when a central bank purchases government securities or other securities from the open market, which lowers interest rates and increases the money supply.
This policy, originally meant to assist poor and middle-class U.S. citizens who suffered from the 2008 financial crisis, has benefited the wealthy more by increasing inequality. Those who suffered from the financial crisis avoided cheap money, while the amount of corporate debt—especially the risky, high-yield kind, also known as junk bonds—continued to increase without providing adequate compensation for investors. Some critics argue that the Fed bailed out banks holding riskier than normal assets by buying those assets from the banks. These assets, largely consisting of mortgage backed securities, constitute approximately 40 percent of the Fed’s balance sheet.
Allan H. Meltzer, a former Fed historian and an economist at Carnegie Mellon University, points out that corporate investment has remained at very low levels. This means that the Fed’s policies have not had the desired effect of increasing capital investments, such as property and equipment purchases by businesses. Instead, corporations have engaged in financial engineering and recapitalization.
The Fed’s activities have created artificial distortions in the financial markets, and, as a result, it has become difficult to judge the health of the economy. According to Rick Rieder, the chief investment officer of fundamental fixed income at BlackRock, this ultimately holds back corporate investment. Jamie Dimon, the CEO of J.P. Morgan, appealed to the Fed in an interview to raise the rates last year. It remains to be seen who secures the leadership of such an economically important institution next year, and how the Fed’s policies might change as a result.