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 Patrick Harker took the reins as president of the Philadelphia Fed
this week, in an appointment that attracted scrutiny because he
served on the committee of directors that interviewed other
prospective candidates for the job he ultimately took.
The Dallas Fed has been without a permanent president for more than
three months as that search process stretches well into its eighth
month. And the Fed's Minneapolis branch abruptly announced the
departure of its leader, Narayana Kocherlakota, more than a year
before he was due to go, with no replacement named to date.
The delays and reliance on Fed employees in picking regional Fed
presidents can only embolden Republican Senator Richard Shelby to
push harder for a makeover of the central bank's structure, which
has changed little in its 101 years.
A bill passed in May by the Senate Banking Committee that Shelby
chairs would strip the New York Fed's board of its power to appoint
its presidents. And it could go further, given the bill would form a
committee to consider a wholesale overhaul of the Fed's structure of
12 districts, which has not changed through the decades of shifting
U.S. populations and an evolving economy.
 The bill is part of a broader conservative effort to expose the
central bank to more oversight, and some analysts saw the
Philadelphia Fed's choice as reinforcing the view that the Fed needs
to open up more to outsiders.
Nine of 11 current regional presidents came from within the Fed, a
proportion that has edged up over time. Twenty years ago, seven of
12 were insiders.
"The process seems to create a diverse set of candidates in which
the insider is almost always accepted," said Aaron Klein, director
of a financial regulatory reform effort at the Bipartisan Policy
Center.
Since it was created in 1913, the central bank's decentralized
structure was meant to check the power of Washington, where seven
Fed governors with permanent votes on policy are appointed by the
White House and approved by the Senate.
The 12 Fed presidents who are picked by their regional boards
usually vote on policy every two or three years, and they tend to
hold more diverse views.
Former Richmond Fed President Alfred Broaddus told Reuters the
regional Fed chiefs have more freedom "to do and say things that may
not be politically popular" because they are not politically
appointed. "On the other hand, there is the question of legitimacy
since they are appointed by local boards who are not elected."
"TONE DEAF"
Two-thirds of regional Fed directors are selected by local bankers,
while the rest are appointed by the Fed's Board of Governors in
Washington.
Critics question how well those regional boards - mostly made of the
heads of corporations and industry groups meant to represent the
public - fulfill their mission.
Last year, a non-profit group representing labor unions and
community leaders organized by the Center for Popular Democracy,
urged the Fed's Philadelphia and Dallas branches to make the
selection of their presidents more transparent and to include a
member of the public in the effort.
Philadelphia's Fed in particular proved "tone deaf" in its
head-hunting effort, said Lou Crandall, chief economist at Wrightson
ICAP in Jersey City, New Jersey.
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Harker was a Philadelphia Fed director when the board started
looking to replace president Charles Plosser, who left on March 1,
and he was among the six directors who interviewed more than a dozen
short-listed candidates for the job, according to the Philadelphia
Fed.
But on Feb. 18, Harker floated his own name, recused himself from
the process and a week later his colleagues on the board unanimously
appointed him as the new president.
While the selection follows Fed guidelines and was approved by its
Board of Governors, it raised questions of transparency and
fairness.
"The Philadelphia Fed's search process might have made perfect sense
in a corporate environment, but is obviously problematic for an
official institution," said Crandall.
The board's chair and vice chair, Swathmore Group founder James
Nevels and Michael Angelakis of Comcast Corp, respectively, declined
to comment, as did Harker.
Peter Conti-Brown, an academic fellow at Stanford Law School's Rock
Center for Corporate Governance, and an expert witness at a Senate
Banking Committee hearing this year, proposed to let the Fed Board
appoint and fire regional Fed presidents or at least have a say in
the selection process.
In the past, reform proposals for the 12 regional Fed banks have
focused on decreasing or increasing their number and their
governance.
Changes to the way the regional Fed bosses are chosen could
strengthen the influence of lawmakers at the expense of regional
interests.
For now, delays in appointments of new chiefs force regional banks
to send relatively unknown deputies to debate monetary policy at
meetings in Washington, as Dallas and Philadelphia did last month
when the Fed considered raising interest rates for the first time in
nearly a decade.
The Minneapolis Fed still has time to find a new president before
Kocherlakota steps down at year end.
"For now the Fed criticism is just noise, mostly from Republicans,"
said Greg Valliere, chief political strategist at Potomac Research
Group. "But once the Fed begins to raise interest rates ... then the
left will weigh in as well."
(Additional reporting Ann Saphir in San Francisco; Editing by Tomasz
Janowski)
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