Skip to main content
Menu

Main navigation

  • About
    • Annual Reports
    • Leadership
    • Jobs
    • Student Programs
    • Media Information
    • Store
    • Contact
    LOADING...
  • Experts
    • Policy Scholars
    • Adjunct Scholars
    • Fellows
  • Events
    • Upcoming
    • Past
    • Event FAQs
    • Sphere Summit
    LOADING...
  • Publications
    • Studies
    • Commentary
    • Books
    • Reviews and Journals
    • Public Filings
    LOADING...
  • Blog
  • Donate
    • Sponsorship Benefits
    • Ways to Give
    • Planned Giving

Issues

  • Constitution and Law
    • Constitutional Law
    • Criminal Justice
    • Free Speech and Civil Liberties
  • Economics
    • Banking and Finance
    • Monetary Policy
    • Regulation
    • Tax and Budget Policy
  • Politics and Society
    • Education
    • Government and Politics
    • Health Care
    • Poverty and Social Welfare
    • Technology and Privacy
  • International
    • Defense and Foreign Policy
    • Global Freedom
    • Immigration
    • Trade Policy
Live Now

Cato at Liberty


  • Blog Home
  • RSS

Email Signup

Sign up to have blog posts delivered straight to your inbox!

Topics
  • Banking and Finance
  • Constitutional Law
  • Criminal Justice
  • Defense and Foreign Policy
  • Education
  • Free Speech and Civil Liberties
  • Global Freedom
  • Government and Politics
  • Health Care
  • Immigration
  • Monetary Policy
  • Poverty and Social Welfare
  • Regulation
  • Tax and Budget Policy
  • Technology and Privacy
  • Trade Policy
Archives
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013
  • October 2013
  • September 2013
  • August 2013
  • July 2013
  • June 2013
  • May 2013
  • April 2013
  • March 2013
  • February 2013
  • January 2013
  • December 2012
  • November 2012
  • October 2012
  • September 2012
  • August 2012
  • July 2012
  • June 2012
  • May 2012
  • April 2012
  • March 2012
  • February 2012
  • January 2012
  • December 2011
  • November 2011
  • October 2011
  • September 2011
  • August 2011
  • July 2011
  • June 2011
  • May 2011
  • April 2011
  • March 2011
  • February 2011
  • January 2011
  • December 2010
  • November 2010
  • October 2010
  • September 2010
  • August 2010
  • July 2010
  • June 2010
  • May 2010
  • April 2010
  • March 2010
  • February 2010
  • January 2010
  • December 2009
  • November 2009
  • October 2009
  • September 2009
  • August 2009
  • July 2009
  • June 2009
  • May 2009
  • April 2009
  • March 2009
  • February 2009
  • January 2009
  • December 2008
  • November 2008
  • October 2008
  • September 2008
  • August 2008
  • July 2008
  • June 2008
  • May 2008
  • April 2008
  • March 2008
  • February 2008
  • January 2008
  • December 2007
  • November 2007
  • October 2007
  • September 2007
  • August 2007
  • July 2007
  • June 2007
  • May 2007
  • April 2007
  • March 2007
  • February 2007
  • January 2007
  • December 2006
  • November 2006
  • October 2006
  • September 2006
  • August 2006
  • July 2006
  • June 2006
  • May 2006
  • April 2006
  • Show More
June 23, 2016 9:30AM

Yes, the Federal Reserve Has a Diversity Problem

By Mark A. Calabria

SHARE

Federal Reserve Chair Janet Yellen recently appeared before the Senate Banking Committee to deliver the Semiannual Monetary Policy Report to the Congress. A handful of Senators queried Yellen as to the lack of diversity among both the Fed staff and the members of the Federal Open Market Committee (FOMC).

Here, for example, is the exchange between Senator Warren and Yellen (paraphrased, as I heard it):

Warren: Diversity is very important. Studies show gender diversity in leadership makes for stronger institutions. I’m not surprised there’s a stunning lack of diversity at our biggest financial institutions. The Fed’s leadership diversity is somewhat better, but not a whole lot better. … Does lack of diversity among regional Fed presidents concern you?

Yellen: Yes, I believe it’s important to have diverse groups of policy makers who can bring different perspectives to bear. It is the responsibility of regional banks’ Class B and C directors to to conduct a search and identify candidates for regional Fed presidents. The Board reviews those candidates and we insist the search be national and every attempt is made to identify a diverse pool of candidates.

Warren: But what about the outcome? When a new regional Fed president is selected by the regional Fed board that person must be approved by you and others on the Board of Governors before taking office. The Fed Board recently reappointed each and everyone of these presidents without any public debate or any public discussion about it. If you’re concerned about diversity, why didn’t you use these opportunities to say enough is enough? Let’s go back and see if we can find qualified regional presidents who also contribute to the overall diversity of the Fed’s leadership?

Yellen: Well we did undertake a thorough review of the reappointments … [etc., etc.]

Warren: [Interrupting] But you’re telling me diversity’s important and yet you just signed off on all these folks without any public discussion about it. ...The selection process is broken. Congress should take a hard look at reforming the regional Fed selection process so that we can all benefit from a Fed leadership that reflects a broader array of backgrounds and interests.

While it is tempting to dismiss such questions as mere identity politics (I’m waiting for Trump to complain about bringing in the Fed Vice Chair from Israel), the Fed has increasingly over time come to look less and less like the rest of America.

Should this matter, at least in terms of monetary policy? I believe it should.

We are a big country and, despite a focus on national aggregates, different parts of the country experience different economic conditions. California isn’t Texas; nor is it Ohio or New York. To some extent these regional differences are why we have the convoluted regional structure of the FOMC. Different voices can bring their experiences and local knowledge to bear in a manner that should result in a monetary policy that weighs the conditions of both New York and Ohio (as well as the rest of the country). Researchers have found that local economic conditions do indeed influence voting behavior on the FOMC. The finding holds not just for the regional bank Presidents, but also for Fed governors.

Of course geography is only one element. Having Fed leadership from different segments of our society, as well as different disciplines, encourages multiple approaches to problem-solving. While I am an economist and see a lot of value in economics, I’d be the first to say economics doesn’t have all the answers. Similarly, bankers can have important insights into the functioning of the economy, but so can manufacturers, retailers and farmers.

A greater variety of backgrounds could also improve Fed communications. Spending a lot of time around economists, I think it is fair to say we often speak a different language, sometimes foreign and strange to outsiders. A Fed board where deliberations occur across disciplines could improve the explanations of those deliberations to the broader public. I know I’ve often learned a considerable amount of economics in the process of trying to explain something to non-economists.

It is perhaps for this reason that Section 10 of the Federal Reserve Act requires that

In selecting the members of the Board, not more than one of whom shall be selected from any one Federal Reserve district, the President shall have due regard to a fair representation of the financial, agricultural, industrial, and commercial interests, and geographical divisions of the country.

Despite the clear language of Section 10, since 1996 80 percent of Fed governors have come from the East Coast (which has only about 30 percent of the population). The chart below shows successful nominees and the Federal Reserve district they were connected with, as viewed by the President who nominated them, the Senate who approved them, and the district of the nominees birth. The fact is we are not getting a monetary policy reflecting the perspectives and needs of the entire nation, but rather one concentrating on those of New York and Washington (which falls in the Richmond district).


Calabria 1 Cropped



To some extent the heavy concentration of appointments to the Board from NY, Boston and DC reflects the revolving door between the Fed, the financial industry and the executive branch (particularly the Treasury and the Council of Economic Advisors). So the lack of diverse perspectives is likely even worse than it seems. Not only do Fed appointments reflect biases favoring New York, but predominately biases favoring New York’s financial industry. Similarly, for Washington, appointments reflect biases favoring the Treasury department or the status quo thinking in monetary economics.

As both The Wall Street Journal and the Harvard Business Review have noted, the FOMC has come to be dominated by academic economists. Josh Zumbrun observed in 2015:

Of the 17 Fed officials in office next year—five members of the Board of Governors and 12 regional bank presidents—all but three will have professional backgrounds as academics or with Goldman Sachs. The exceptions will be Atlanta Fed President Dennis Lockhart and Fed governor Jerome Powell, who worked at other banking institutions, and Kansas City Fed President Esther George, who was primarily a bank supervisor.

About 70 percent of Fed Board members and regional Presidents were once either Fed economists or academics:


Calabria 2



Educational background of FOMC’s members has also become more concentrated around PhDs in economics:


Calabria 3



Additionally, Fed economists themselves are heavily concentrated among the graduates of a handful of graduate programs:


Calabria 4



Don’t get me wrong. A couple of smart economists with degrees from MIT, who have lived most of their lives in either Boston, New York or DC, are certainly able to contribute to monetary policy. But when the entire system starts to consist of individuals from the same small number of cities, who graduated from the same schools and studied the same disciplines, then “yes” we have a problem. You are guaranteed to have an institution that suffers deeply from groupthink, as well as being insulated from the everyday experiences of most Americans.

Senator Warren suggests that “the selection process is broken.” I couldn’t agree more. To repair it, we must first recognize that the choice of Fed Board members begins with the President. At a minimum the President should faithfully follow the considerations spelled out in Section 10 of the Federal Reserve Act. If he fails to do so, as was the case with the nomination of Peter Diamond, the Senate is obligated to reject that nomination. While Diamond’s case was clear, previous nominations have been less so. To provide some clarity, I would suggest that Congress amend Section 10 to list specific conditions determining residency. I believe a minimum of ten years actual residency should be the requirement for a nominee to be “from” a particular Fed district.

Congress could put additional limitations on Board appointments to increase diversity. For example, amending Section 10 to state that no more than two board members may come from any one of “finance, manufacturing, agriculture, government or academia” would reduce groupthink and likely increase the quality of decision-making at the Fed. Slowing the revolving door between the Fed, Treasury and finance could also increase diversity. I would suggest we ban from consideration for Fed nomination anyone who has served in the executive branch in the previous six years and impose a similar ban for those working for institutions regulated by the Fed.

Having worked on Fed nominations as a staffer for the Senate Banking Committee, I’d be the first to say that the Senate has too often rubber-stamped a President’s Fed nominees. Recent years have witnessed an improvement in Senate due diligence, but far more needs to be done. Changes in the norms behind Senate consideration may not be durable. Accordingly changes to the selection process for the FOMC are badly needed. I agree with Sen. Warren, the Fed needs leadership with a “broader array of backgrounds and interests.” Which means the definition of diversity must also include geographic diversity, educational diversity, and diversity of professional experience. The quality of monetary policy-making depends on it.

[Cross-posted from Alt-M.org]

Stay Connected to Cato

Sign up for the newsletter to receive periodic updates on Cato research, events, and publications.

View All Newsletters

1000 Massachusetts Ave. NW
Washington, DC 20001-5403
202-842-0200
Contact Us
Privacy

Footer 1

  • About
    • Annual Reports
    • Leadership
    • Jobs
    • Student Programs
    • Media Information
    • Store
    • Contact
  • Podcasts

Footer 2

  • Experts
    • Policy Scholars
    • Adjunct Scholars
    • Fellows
  • Events
    • Upcoming
    • Past
    • Event FAQs
    • Sphere Summit

Footer 3

  • Publications
    • Books
    • Cato Journal
    • Regulation
    • Cato Policy Report
    • Cato Supreme Court Review
    • Cato’s Letter
    • Human Freedom Index
    • Economic Freedom of the World
    • Cato Handbook for Policymakers

Footer 4

  • Blog
  • Donate
    • Sponsorship Benefits
    • Ways to Give
    • Planned Giving
Also from Cato Institute:
Libertarianism.org
|
Humanprogress.org
|
Downsizinggovernment.org