The Federal Reserve has a reputation for making decisions on a near-unanimous basis. Fed insiders laud it as “consensus-driven” policy; critics call it “groupthink.” The criticism has ramped up amid the Trump administration’s efforts to disrupt Fed consensus by placing Stephen Moore and Herman Cain, both friends of the president, onto the Fed board.
While Fed officials acknowledge that monetary policy decisions rarely face dissent, the Fed board has faced some disagreement as of late in the regulatory space, where the pendulum is swinging in favor of softer banking regulations.
Lael Brainard, the last remaining Fed governor not to have been nominated by President Donald Trump, has dissented on regulatory matters five times in just the last year, amid the central bank’s efforts to pare back some post-crisis bank rules.
‘I see no change in the financial environment’
Although outnumbered by the existing Trump appointees who have advocated for a lighter regulatory touch, Brainard’s outspoken criticism speaks to a difference in opinion over the appropriate way to police the banking industry.
Most recently, she dissented against a proposal to reduce requirements on “living wills,” an annual submission detailing a bank’s strategy for winding down its assets in the event of financial distress or failure. The exercise is designed to make sure banks can manage insolvency without risking contagion to the rest of the banking industry.
Currently, banks above $50 billion must submit living wills once a year. But under the proposal released Monday, banks with between $100 billion to $250 billion in assets will be exempt from the requirements entirely, and banks with between $250 billion to $700 billion would only file a full submission every six years. Banks above $700 billion, covering the eight largest U.S. banks, will submit plans every four years.
Voting against the proposal, Brainard warned that the banks benefiting from the proposal are still of systemic risk to the financial system.
“I see no change in the financial environment that would require us to weaken protections that are vital to a safe and sound financial system and ensure large banks—and not taxpayers—are on the hook,” Brainard said in a statement.
5 Brainard dissents in just the past year
In the last two years, Washington, D.C. has been in the process of reviewing the bank regulations put in place after the financial crisis. When President Donald Trump and a Republican-controlled Congress took power, lawmakers began a review of the Dodd-Frank post-crisis regulatory framework, suggesting that some of the rules went too far and constrained bank lending in the U.S.
In May of 2018, a package bill with the signatures of a number of moderate Democrats made it to Trump’s desk imposing across-the-board changes to the regulatory framework. Among the provisions: reducing the frequency of stress tests and raising the threshold for extra regulatory scrutiny.
Proponents argued that the bill appropriately tailors regulation, while opponents say it jeopardizes important safeguards against the next crisis.
Brainard has been the only opponent inside the Fed, and has criticized reform efforts headed by Vice Chairman Randal Quarles, the Trump appointee in charge of leading regulatory issues at the central bank. In just the last year, Brainard has dissented against five regulatory changes.
She opposed a change that would ease the calculation of the enhanced supplementary leverage ratio (a measure of a large bank’s capital levels) and voted against the Fed’s decision not to activate the countercyclical capital buffer, a temporary increase in capital requirements when an economy is at risk. In addition to voting against changes to the pass/fail grading system on stress tests, Brainard also opposed a proposal suggesting a tiered system for reduced liquidity requirements.
Her dissents stand out because the Fed has voted unanimously on all regulatory policies since 2012 — not a surprise given the fact that Obama-era Fed appointees filled the entire board until Trump ascended to the White House. But Brainard has taken on the difficult role of defending the previous administration’s policies as Trump pushes for more politically-charged candidates, underscoring a tough challenge at an institution that insists on being politically independent.
In a detailed speech in December 2018, Brainard warned that her concern over regulatory changes stems from observations over past U.S. recessions being triggered by excessive risk-taking. Her argument: that as the economy inches toward its longest recovery on record, regulators need to be careful.
“At a time when cyclical pressures have been building and bank profitability has been strong, it might be prudent to ask large banking organizations to fortify their capital buffers, which could subsequently be released if conditions warrant,” Brainard said.
‘A range of perspectives’
On monetary policy, the story is different. The Fed board rarely sees dissent.
Fed Chair Jerome Powell recently told “60 Minutes” that he sees a “range of perspectives” from the twelve federal reserve bank districts that make up the Federal Reserve System.
“You want to hear disagreement around issues before you make a decision,” Powell said. “I think mistakes get made when everyone agrees and no one tries to explain why the decision is incorrect.”
Yet under Powell’s watch, no Fed governor has ever dissented on a Federal Open Market Committee decision. Dissent also never occurred under his predecessor Janet Yellen, nor did it ever happen under her predecessor Ben Bernanke.
The last time a Fed governor dissented was in September of 2005, when Mark Olson disagreed with the Alan Greenspan-led decision to raise interest rates. Olson preferred to wait on changing the benchmark rate until after the economic effects of Hurricane Katrina were clear.
Since then, the FOMC has faced occasional dissent from a reserve bank president, but the Fed governors have never broken their voting bloc. President Donald Trump, frustrated with the Fed’s decisions to raise rates in 2018, hopes to disrupt that by adding Moore and Cain to the Fed board.
Moore, who served as economic adviser to the 2016 Trump campaign, suggested cutting interest rates by 50 basis points. Cain, who heads a political action committee supporting Trump, once suggested that the Fed uses monetary policy to “manipulate” the economy and advocated for bringing back the gold standard.
The prospect of shaking up the Fed consensus has some Republican senators excited. Ben Sasse of Nebraska told The Wall Street Journal that Moore’s nomination “has thrown the card-carrying members of the Beltway establishment into a tizzy, and that says little about Steve and his belief in American ingenuity, but a lot about central planners’ devotion to groupthink.”
John Soroushian, a senior policy analyst at the Bipartisan Policy Center, told Yahoo Finance that having a diversity of opinion is welcome as long as it does not taint the independence of the central bank. Still, the administration’s choices on Fed nominees are extremely influential to the leaning of Fed policies — on monetary policy but especially on the regulatory front.
“Having more members who support more deregulation would help further push the boundary of deregulation,” Soroushian said.
On regulation, Moore has confused the Volcker rule for a monetary policy rule on commodity pricing that may have never existed, and Cain’s 2012 bid for president aspired to “get government off the backs of the banks.” A Fed board with Moore and Cain could present a whole new challenge for Brainard, the lone dissenter.
Brian Cheung is a reporter covering the banking industry and the intersection of finance and policy for Yahoo Finance. You can follow him on Twitter @bcheungz.