Traditional Mysteries

Close readers of the economics pages may have noticed the confirmation of Janet Yellen as Chair of the Federal Reserve Bank—and wondered why, in the stories about this event, pundits are treating the lady as a de facto Queen of Finance in the United States—indeed, as one put it, the most powerful woman in the world.

After all. After all, if we stick strictly with the mechanics of the thing, the policy set by the Federal Reserve Bank is expressed in the decisions taken by the Federal Open Market Committee (FOMC). That body is made up of twelve members and reaches decisions by voting. Seven of its members, including the chair, are members of the Board of Governors of the Federal Reserve System. Five other members are drawn from the twelve presidents of the twelve regional Federal Reserve Banks of the United States. One of those, however, has a permanent seat on the FOMC, the president of the NewYork Federal Bank. The other four serve for one year and are then replaced by another four drawn from regional federal banks.

What we have here, in other words, is a straight-forward democratic arrangement in which the Chairwoman of the Fed could just as likely be on the losing as on the winning side of a particular vote. Why then is she treated as the de facto “monarch” of monetary policy.

Well, the simple answer is that she actually is—now that she is confirmed. But the reason for that has little to do with voting and everything to do with the gradual evolution of a tradition. Let me try to describe this.

The simplest way to put this is that the FOMC is governed by consensus—not really by majority vote. The consensus forms around the person of the Chair. In the course of FOMC meetings, members of the committee may disagree with the Chair and may also express their dissent in so many words; but when it comes to a vote, they will back the Chair. It is customary for all Governors to vote unanimously with the Chair—and to be joined by the President of the New York Fed in doing so. That produces a majority of eight, each time. But the tradition at the FOMC is that no no more than two members may dissent. This is described as the “informal policy of the FOMC.” Dissents, some say, are intended to signal potential changes in policy in the future.

It’s quite amusing, in a way, to read how academic observers of this process attempt to explain it. At best they merely describe how it has gradually come about. As for the Why of this curious centering of effective power in one person, students of the process fall back on equally nebulous phrases. The importance or prestige of the office has gradually increased. A “tradition” rules this community; it is made up of, after all, highly qualified experts who’ve spent entire working lives in or around banking and finance. They all abhor the evil consequences of signaling rifts to the Market. The real decisions are worked out in privacy and out of the glare of journalistic light. Therefore, you see. And, presumably, whoever is appointed to be Chair of this institution will be reliably a member of this community and will uphold the traditional way. She or he will move to a vote only after the decision has been sanctioned by consensus.

No wonder, then, that chairs of the Fed are by any measure the most careful speakers in public—and their words are subjected to careful parsing as if they were an omen or issued from some being beyond the clouds.

It remains a fact, nonetheless, that this very sane and deliberate tradition of governance—at least of a part of our public affairs—could break down and, given time enough, someday will do so. Not, we hope, under Janet Yellen. May she rule in peace.