WASHINGTON (Reuters) - President Barack Obama’s two nominees to the Federal Reserve appear likely to fall victim to a long-running political feud, which would leave the central bank short-handed as it struggles with tough regulatory and monetary policy questions.
Republican Senator David Vitter has demanded that the Senate hold a debate before any vote on the nominees, which would require Democratic leaders to muster a super majority to move forward - a hurdle that may be too high to clear.
As a result, the Senate may end up abandoning the nominees, Harvard economist Jeremy Stein and investment banker Jerome Powell, and leave a decision on filling out the normally seven-member Fed board until after this year’s presidential election.
“I refuse to provide Chairman Bernanke with two more rubber stamps who approve of the Fed’s activist policies,” Vitter said when asked if he planned to lift his hold on the nominations.
Leaving the central bank short-staffed deprives it of top-notch monetary policy and financial market expertise that could prove valuable given the stop-and-go nature of the U.S. recovery and economic threats coming from Europe.
It could also undermine the institution’s efforts to get up to speed on regulatory matters now that Congress has vastly expanded its responsibilities for ensuring financial stability.
“The demands on the Fed right now are intense,” said Nathan Sheets, an economist for Citigroup and the former director of the Fed’s division of international finance. “Leaving talented nominees on the sidelines - when there is so much scope for them to contribute - increases the stresses on the Fed and makes these demands even heavier than they would otherwise be.”
More troubling to some is the antipathy toward the Fed that Vitter’s opposition reflects. His move is merely the latest skirmish in an eye-for-an-eye vendetta in which both parties have blocked Fed nominees in the hope they would soon capture the White House.
“There can be no question that this practice brings the Fed squarely into the extraordinarily divisive political environment of our time,” said Alfred Broaddus, who was president of the Richmond Federal Reserve Bank from 1993-2004. “It’s bad for the Fed and bad for the country.”
Republicans, including presidential contender Mitt Romney, have deplored the Fed’s aggressive steps to stimulate the weak economy as a dangerous flirtation with inflation, while left-of-center voices have taken the central bank to task for not being even more aggressive.
Since officials on the Fed board are usually aligned with the chairman on matters of policy, thin staffing could weaken support for Bernanke as he tries to maintain consensus behind an ultra-easy monetary policy in the face of the criticism.
Stein and Powell need to win the Senate’s approval in order to take office, but Vitter’s opposition creates a tough barrier.
Democrats control 53 votes in the 100-member chamber, but under Senate rules, they would need to muster 60 votes just to bring the nominees up for a vote, given Vitter’s opposition.
The various votes and debate could take as long as two weeks. But with highway funding, government spending and cyber security legislation looming, Senate Democratic leaders are not likely to make the Fed nominees a priority.
In addition, Democrats would be loath to spend precious political capital defending an unpopular central bank in an election year. Senate Majority Leader Harry Reid will be thinking long and hard before calling on any Democrat in a tight race to support a controversial cause.
“We are still trying to find a way to get Senator Vitter to drop his obstruction,” said Reid spokesman Adam Jentleson.
The board has not been at its full seven-member strength since April 2006, and it could soon be depleted even further. The term of Elizabeth Duke, the last remaining George W. Bush appointee, expired in January, and while board members can stay in office until replaced, she has not committed to doing so.
Obama’s two nominees seemed like a good bet to win bipartisan approval. Powell served under Republican President George H.W. Bush and was a partner at the Carlyle Group, a well-connected Washington-based private equity firm. Stein served as an economic adviser under presidents of both political parties.
It would not be the first time an Obama Fed nominee has fallen by the wayside over partisan objections that have made a short-staffed Fed board the norm. Even winning a Nobel prize in economics did not open the door for MIT economist Peter Diamond.
“Dr. Diamond is an old-fashioned, big government Keynesian,” said Senator Richard Shelby, the top Republican on the Banking Committee, whose objection forced Diamond to withdraw.
While the Senate did go on to approve state banking regulator Sarah Raskin and regional Fed bank president Janet Yellen to roles on the Fed board, many saw Diamond’s rejection as a rejoinder to the unwillingness of Democrats to approve two Bush nominees ahead of the 2008 presidential election.
The bad blood dates to a hold then-Senator Phil Gramm, a Texas Republican, placed on the nominations of Carol Parry and Roger Ferguson during the Clinton administration ahead of the 2000 election, observers say.
Reporting by Mark Felsenthal; Editing by Tim Ahmann and Dan Grebler