August 6, 2010 / 1:43 AM / 9 years ago

UPDATE 2-Senate rejects Fed nominee Diamond before voting

(Adds background, details, analyst comment)

By Pedro da Costa and Rick Cowan

WASHINGTON, Aug 5 (Reuters) - The U.S. Senate on Thursday scrapped the nomination of Peter Diamond to the Federal Reserve Board, dealing a blow to President Barack Obama’s push to fill long-standing vacancies at the central bank.

The rejection of a nominee to the Fed’s board, until recently seen as a largely technical body, highlights the increased political attention on the U.S. central bank in the wake of the worst financial crisis in generations.

The Senate returned the nomination to the White House, according to aides to Senate Majority Leader Harry Reid, effectively killing it.

Diamond, an MIT professor and expert on taxes and Social Security, faced opposition from Republicans in the Senate Banking Committee, which backed his nomination last month by a 16-7 margin, clearing the way for a vote in the full Senate.

Obama’s appointments, which also include San Francisco Fed President Janet Yellen and Maryland regulator Sarah Raskin, come at a time when the Fed faces momentous decisions about whether to beef up or ease off the extraordinary stimulus it has provided to the economy in response to the recession.

Fighting the worst slump since the Great Depression, the central bank slashed interest rates nearly to zero and undertook a host of emergency measures to pump money into frozen credit markets.

The surprising opposition to Diamond suggests more political gridlock for Obama ahead of November congressional elections that are expected to be heated, with the weak economy a top campaign issue.

“Whether or not you were thrilled at his appointment, this doesn’t look good, it looks like a mess,” said Michael Feroli, chief U.S. economist at JP Morgan and a former Fed staffer.

The U.S. economy has been growing firmly for a year, but second quarter data showed a marked slowdown. Unemployment, currently 9.5 percent, has yet to come down significantly after a recession that destroyed over 8 million jobs.


The animosity toward Diamond, who has said he is more worried about deflation than inflation, first emerged during the Senate committee vote on the nominees.

Richard Shelby, the committee’s top Republican, said at the time that Diamond did not have the right sort of experience for the job.

“I do not believe the current environment of uncertainty would benefit from monetary policy decisions made by board members who are learning on the job,” the Alabama senator said.

The full Senate had been expected to consider Diamond’s nomination, along with those of Janet Yellen and Sarah Raskin, when it returns from its summer recess.

It was unclear whether Obama would resubmit Diamond’s nomination or name someone else to the post.

The Fed was not immediately available for comment.

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