Senate confirms a Fed nominee, two others languish

By Thomas Ferraro

WASHINGTON (Reuters) - The U.S. Senate confirmed a career community banker to the Federal Reserve Board on Friday, but left two other Bush nominees languishing in a compromise that brings the central bank only partway to full strength at a time of unusual economic stress.

Without dissent, the Democratic-led Senate approved the nomination of Elizabeth Duke, chief operating officer at TowneBank in Portsmouth, Virginia, to serve at the Fed as part of a deal reached with the White House on dozens of President George W. Bush's nominees to a variety of federal posts.

The action may give Fed Chairman Ben Bernanke a valuable ally on interest-rate policy at a difficult juncture. With commodities prices soaring, Bernanke has faced several dissents in recent months from regional Fed bank presidents favoring higher rates.

However, the Senate declined to act on two other Fed nominees: Larry Klane, a former Capital One Financial Corp executive, and current Fed Governor Randall Kroszner, who can serve until replaced even though his term has expired.

The three nominees have been caught in an election-year deadlock. Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat whose panel has jurisdiction over the nominations, had held them up in an apparent bid to keep the positions open for the next president to fill.

Some analysts had warned against leaving the central bank board -- the epicenter of U.S. monetary policy-making and a key financial market regulator -- short-staffed at a time when the economy is at risk of recession, inflation is soaring and financial markets are teetering.

"Some of the senators had seemed to be taking more of a foot-dragging approach," said Kim Rupert, managing director of global fixed income analysis at Action Economics LLC in San Francisco. "I think they kind of discovered that that probably was not a good idea for the Fed at this point in time ... so they got their act together."

Little is known about Duke's views on interest-rate policy. While she will help restore some balance to a Fed board lacking in hands-on banking experience, she is less familiar with the broader financial regulatory issues the Fed now confronts.

"This is an unqualified nominee who will be a cipher in macropolicy discussions at the (Fed) and reliably in the tank for industry on regulatory issues," said Tom Schlesinger, the head of the Financial Markets Center, a nonprofit Fed-watching group.

LESS-HAWKISH TILT

In terms of monetary policy, Duke's confirmation may help keep the power of the Fed's Washington-based Board of Governors from being diluted at a time some of the Fed's regional banks, which also have a voice on the policy-setting Federal Open Market Committee, seem to be taking a tougher anti-inflation stance than the board.

"Putting another Fed governor back in at the FOMC meetings could really undercut the move in the committee to a full inflation risk tilt at this point," said Chris Rupkey, senior financial economist at the Bank of Tokyo-Mitsubishi UFJ.

This could be particularly important because another Fed governor, Frederic Mishkin, is stepping down at the end of August, at which time the board will again have two vacancies. Members of the Fed board rarely vote differently than the chairman.

Each member of the Fed board gets a vote at every FOMC meeting, as does the president of the New York Federal Reserve Bank. The heads of the Fed's 11 other regional banks vote on a rotating basis that shifts each year.

Currently, the central bank is fighting an economic war on two fronts. It cut rates by an aggressive 3.25 percentage points in seven steps dating to September, but held steady at a meeting on Wednesday, warning that inflation risks are rising.