With leaks and vacancies, US Fed on shaky ground

federal-reserveWASHINGTON: Tuesday’s sudden resignation of a US central bank policy maker finds the Federal Reserve on shakier ground, with the Trump administration poised to reshape it by filling several empty seats.

Jeffrey Lacker, president of the Richmond Federal Reserve Bank, announced he was resigning immediately for his role in the 2012 leak of confidential information on monetary policy which became the subject of an inquiry by the Federal Bureau of Investigation.

Lacker’s fall came at the tail end of years of controversy that erupted after the economic research firm Medley Global Advisors learned the contents of a Fed meeting before they were released to the public.

‘I should have declined’

The former Richmond Fed president, 61, apologized for his missteps, saying that he had continued to speak to an analyst even after she revealed she was in possession of highly valuable information concerning future Fed moves on economic stimulus.

“Due to the highly confidential and sensitive nature of this information, I should have declined to comment and perhaps have ended the phone call,” Lacker said in announcing his resignation, saying it had not been his intention to confirm the leak.

Lacker, whose term was due to expire in 2020, also admitted that he had failed to come clean about his role in the leak for more than two years.

The Fed veteran had previously announced he would step down in October. His abrupt exit saps the Fed’s credibility at a time when it faces intense criticism in Congress.

According to Barclays chief US economist Michael Gapen, Lacker’s undoing presaged “a significant loss of Fed credibility which will give ammunition to those who think Fed decisions need greater scrutiny.”

The Medley Global leak was a source of tension with lawmakers who insisted on an investigation. It may also provide fodder for those calling for the Fed to be audited, as recent draft legislation introduced last week demands.

In such a setting, according to Gapen, any misstep by the central bank in the leak matter “means the likelihood of legislative action that reduces the Fed’s independence increases.”

As for monetary policy, removing Lacker from the picture will not immediately affect the balance of views on the Fed’s Federal Open Market Committee, which sets interest rates.

Lacker had not been a voting FOMC member this year. A search for his replacement was already under way.

When he participated in committee meetings, Lacker, who had served as Richmond Fed president since 2004, sided with the “hawks,” those who want to tighten rates and emphasize the risk of inflation after years of easy money in the post-financial crisis era.

Dodd-Frank in the crosshairs

The Fed on Wednesday also lost another highly important member with the departure of Governor Daniel Tarullo, the Fed’s architect of post-financial crisis banking regulation, an area currently in the crosshairs of the Trump administration, which wants to revise the Dodd-Frank reform law.

Tarullo, 64, had announced his departure in February.

In a valedictory address at Princeton University delivered on Tuesday, Tarullo said strong capital requirements for major banks should be upheld.

While congressional Republicans want to rewrite large parts of Dodd-Frank, Tarullo said he was open to modifying some Dodd-Frank requirements on stress tests. He also said he believed complying with the Volcker rule — aimed at curtailing banks’ risky proprietary trading — could be overly complicated.

With Tarullo’s departure, Trump now has three of seven seats on the Federal Reserve Board to fill.

The previous administration of President Barack Obama was unable to fill the other two vacancies due to opposition in the Senate.

Trump could also replace Fed Chair Janet Yellen at the end of her term in February 2018 and Vice Chair Stanley Fischer the following June.