President Bush nominated two economists last week to fill the two empty seats on the Federal Reserve Board. If the Senate confirms Donald Kohn and Ben Bernanke, the Board will be full for the first time since 1998 when Susan Phillips completed her term. The Board had a single vacancy for about year, and another vacancy after Alice Rivlin resigned. President Clinton nominated a banker during his administration to fill one of the vacancies, but the Senate wouldn't vote on the confirmation. President Bush nominated Mark Olson and Susan Bies last year to fill the old vacancies, but since then Ed Kelley resigned and Larry Meyer filled out his term. The Board was once again two governors short of a full house.

Who are the nominees?
A White House statement issued last Wednesday said the President intends to nominate Ben Bernanke to serve the remainder of a 14-year term expiring January 31, 2004. Dr. Bernanke is currently the Chair of the Department of Economics at Princeton University, where he joined the faculty in 1985. Bernanke does not have previous Fed experience (working at neither the Board of Governors nor any of the Federal Reserve Banks) but has served in the capacity of advisor to New York Fed President William McDonough. He is a highly respected monetary economist and an advocate of inflation targeting.

Donald Kohn is the other prospective nominee to the Board and is to serve the remainder of a 14-year term expiring on January 31, 2016. Kohn has a long history at the Fed. He joined the staff at the Board of Governors in 1975. He is currently Advisor to the Board for Monetary Policy. His previous positions include Director of the Division of Monetary Affairs and Deputy Director of Monetary Policy and Financial Markets in the Division of Research and Statistics. Dr. Kohn also worked at the Federal Reserve Bank of Kansas prior to joining the Board.

While Bernanke's career is primarily academic, Kohn has served as a senior staffer on the Board in tandem with Alan Greenspan. As a senior member of the Board staff, Kohn was in position to advise the Fed Board and district bank presidents over the past 15 years. Incidentally, more than 20 years have passed since a Board position was filled from within. In 1980, Lyle Gramley, also a senior staffer, was sworn in as governor.

Consider the implications
Alan Greenspan's term as chairman expires in two years (June 20, 2004). He has successfully navigated the economic waters since his term began in August 1987, and financial market players revere him. However, Greenspan is already 76 years old, and despite his good health, most people don't expect that he will be reappointed to another term as chairman.

In the May 13, 2002 issue, Jim McTague of Barron's surmises on the potential successors to Greenspan. It is expected that President Bush will appoint someone with stature that is respected by financial market players. Supposedly, Mr. Greenspan has veto power on his potential successor. McTague reminded us that while Greenspan was a familiar name to Wall Street and Corporate America, it wasn't a name that inspired confidence at the time. After all, Paul Volcker was the superhero that wiped out inflation. Who could possibly replace him? Yet financial market players were quickly inspired by Greenspan's handling of the 1987 stock market collapse. Greenspan fed the markets with liquidity and prevented a recession.

Jim McTague mentions a handful of potential suitors to the top Fed spot. Larry Lindsey, John Taylor, Peter Fisher, Roger Ferguson and Robert McTeer are named as possibilities to ascend to the monetary throne. While all have ample grounds for getting the top spot, one can find at least a couple of reasons why these men should not be nominated to become the Fed's head honcho. Other names are likely to surface in the next year or two as we come nearer to the end of Greenspan's term. Keep in mind that the chosen may not have Greenspan's stature at first, but could very well grow into it as circumstances allow.

It is always important to make sure that someone on the Board is well schooled (by education or experience) in the process of the economic business cycle. Aside from Greenspan, the only member of the Board who was a respected and prominent economic forecaster was Larry Meyer. Current Board members don't have the breadth of experience of Mr. Greenspan. By nominating Donald Kohn, President Bush has ensured that at least one member of the Board of Governors (outside the Chairman) has long-standing policy-making experience. Indeed, as a senior staffer, Kohn regularly advised the Federal Open Market Committee in their monetary policy deliberations. Having Kohn on board may give President Bush, when the time comes, more leeway in appointing a Fed chairman.

The Bottom Line
When the Federal Reserve Board was first instituted, Congress chose to create seven positions on the Board of Governors, with 14-year terms staggered every two years in order to maintain an experienced Board. Since the 1980s, very few governors have served 14-year terms. More often than not, governors resign to accept more lucrative positions in the private sector. (Some governors are less mercenary, becoming policymakers in other branches of government or returning to academia.)

Due to political wrangling during the end of the Clinton Administration, the Senate refused to confirm Clinton's appointments. Consequently, the Board of Governors has filled only five of its seven positions since 1999. It is not only refreshing but also reassuring that the Board will be operating at full capacity soon.

Evelina M. Tainer, Chief Economist, Econoday