Federal Reserve Gov. Frederic Mishkin said Wednesday that he would resign from the central bank at the end of August to return to his Columbia University teaching post.
His surprise announcement leaves an already short-staffed central bank even more depleted in the midst of the most challenging economy in decades.
With Mishkin's departure, the seven-member Fed board of governors could be pared down to four. The Democratic-controlled Senate for nearly a year has refused to vote on President Bush's nominees to fill several open Fed slots. If the Senate delay continues, whoever is elected president in November will have a chance to quickly shape the policymaking arm of the central bank through new appointments.
Fed Chairman Ben Bernanke is likely to push for faster congressional action, given the central bank's staggering responsibilities as it struggles to keep up with turmoil in financial markets, draft tighter rules for mortgage and credit card lending and step up oversight of the banking industry.
"The workload just gets immense," says Lyle Gramley, a former Fed governor who is now with Stanford Washington Research Group. "There's going to be a lot of pressure" for the Senate to act.
The Fed board needs only a simple majority vote in most instances. But five votes are called for in some sensitive cases, such as lending to entities that aren't traditional banks — which the Fed has been forced to do this year as credit has dried up in financial markets. Still, even here, existing law includes ways the Fed can act with fewer than five members.
Mishkin backed rate cuts
Mishkin, 57, is a highly regarded economist and textbook author who is a close ally and former research partner of Bernanke.
He has been a force behind the central bank's recent policy of aggressive interest rate cuts to shield the economy from the fallout of the housing and financial market meltdowns. Other Fed officials have been more involved in financial market operations.
Mishkin, who has been on the Fed since 2006, is an expert on globalization. Along with Bernanke, he supports setting a Fed target for acceptable inflation as a way to make central bank policy more predictable.
Mishkin also argues that central bankers should not use the blunt tool of interest rate policy to prevent asset bubbles, like the recent high-tech and housing boom markets that later went bust. But in a recent speech, Mishkin said the Fed should make greater use of its regulatory powers to address skewed market incentives that can result in credit-led bubbles.
"To some extent, Mishkin was and still is sort of an alter ego for Bernanke," says Nariman Behravesh, chief economist at Global Insight. "Not having him on the board may make it tougher for Bernanke to build a critical mass around some of the things he's trying to do, including inflation targeting."
Some analysts suggested that Mishkin's departure could strengthen the role of regional Fed bank presidents who, along with Fed governors, vote on interest rate policy. Philadelphia Fed President Charles Plosser and Dallas Fed President Richard Fisher voted against the Fed's April 30 decision to cut a key interest rate by a quarter point to 2%, arguing that a move was unwise when inflation pressures were mounting.
Departure shifts balance
Since that meeting, Fed officials, including Bernanke, have signaled that they are unlikely to cut rates more in coming months, given rising energy, food and other commodity costs. The Fed is next scheduled to address rates in late June.
"His resignation shifts the balance a little bit … away from rate cutting, which we already knew," says Brian Wesbury of First Trust Advisors in Illinois. "This will clearly give the regional banks more power."
Gramley says the change won't make an enormous difference, given that the Fed was already moving away from rate cuts.
The Fed is actually even thinner than the numbers suggest, as Fed Gov. Randall Kroszner, one of the five governors currently on the Fed, has a sort of provisional status.
Kroszner's term expired at the end of January. Bush has nominated Kroszner to a full 14-year term, but Senate Banking Committee Chairman Christopher Dodd, D-Conn., hasn't acted on confirmation. Fed policy allows a governor to remain until a successor is named.
In a statement Tuesday, Dodd thanked Mishkin for serving "during one of the most critical and important economic periods of the nation's history" but didn't indicate whether he'd be inclined to revive talks aimed at bulking up the Fed board, at least temporarily.
Aside from Kroszner, stalled Bush Fed nominees are Elizabeth Duke, former chief operating officer of TowneBank of Virginia, and Larry Klane of Capital One Financial, a major credit card issuer.
Before joining the board, Mishkin was a professor at the Columbia University Graduate School of Business. He has also taught at the University of Chicago, Northwestern University and Princeton University.