Geoffrey M. B. Tootell [*]
In the United States, private citizens play little direct role in policymaking. The directors of the boards of the regional Federal Reserve banks are an apparent exception to this rule. These directors recommend changes in the discount rate, although the Board of Governors decides whether to act on the recommendations. These directors would have greater influence if they affected the FOMC votes of their district bank presidents. This paper shows that the FOMC votes of the regional bank presidents are strongly correlated with the discount rate recommendation of their bank's board. Several alternative explanations for the correlation are then examined.
The directors who sit on the boards of the 12 district Federal Reserve banks are the rare private citizens who have a direct role in government decision making. These nine business, labor, financial, and community leaders are neither elected nor appointed by elected officials; as a result, their goals could differ from those of the nation as a whole. Although these directors do not actually set policy, they do recommend changes in the discount rate to the Board of Governors of the Federal Reserve System. Thus, on the surface their role in monetary policy deliberations is only advisory. However, their influence could in fact be substantially more important if they actually affected the Federal Open Market Committee (FOMC) votes of their respective Reserve bank presidents. This paper examines this more significant link to monetary policy by testing the relationship between the discount rate recommendation of the Reserve bank's board of directors and the vote of that district's bank president at the FOMC. It is shown that the FOMC votes of Reserve bank presidents are significantly correlated with their board's current discount rate recommendation.
Given the distinct responsibilities of the district board and the bank president, it is entirely possible that the president's vote would differ from the discount rate recommendation. By law, each Reserve bank's board of directors must make a discount rate recommendation to the Board of Governors every two weeks. On the other hand, every eight weeks a Reserve bank president must decide on his or her own view of the proper course for monetary policy at the FOMC meeting. De jure, there is no reason that the two decisions should conform. De facto, it is unclear whether, or by how much, the local board's discount rate recommendation influences the president's FOMC deliberations or whether or by how much the district president influences the local board's discount rate recommendation. This paper presents evidence that the two decisions are made separately but that the discount rate recommendation does help explain the president's FOMC vote.
For several reasons, one might expect the determinants of the local board's discount rate recommendation to differ from those of the president's FOMC vote. The local boards may have concerns and perspectives that deviate from those of FOMC members in general and their own president in particular. For example, members of the district board may disproportionately weight their region's economic performance, while the bank's president may have a stronger national focus. In fact, McNees (1993) shows that several district boards respond to regional economic conditions, while Tootell (1991) finds that district bank presidents do not base their FOMC votes on the economic performance of their regions. It is also possible that the district banks' boards of directors have different national goals than members of the FOMC; for example, local boards may disagree with their president on the relative costs of inflation and unemployment. Finally, the district board's forecast could systematically diverge from that of its pr esident. Any one of these possible causes could produce a schism between the discount rate recommendation of the bank's board of directors and the FOMC votes of its president.
On the other hand, there are several reasons why the two decisions should be highly correlated. As a national instrument, the FOMC vote of a bank president should depend on national economic conditions. The performance of the economy should be highly correlated with the variables, be they national, regional, or industry specific, that determine the local boards' discount rate recommendations. It is shown, however, that the macrovariables thought to be significant determinants of FOMC behavior do not explain all the correlation between a Reserve bank's discount rate recommendation and its president's FOMC vote. Alternatively, a bank's discount rate recommendation and its president's FOMC vote might be correlated because either the local board or the president is, essentially, making both decisions. However, evidence presented in this paper suggests that neither the district bank's board nor its president dominates both decisions. Finally, the district presidents and their boards may tend to agree on monetary policy and disagree with the rest of the Federal Reserve System because they share an outlook for the economy that differs from the rest of the FOMC, because they share goals at variance with the rest of the FOMC, or because they use a different model than the FOMC to analyze the data. All three of these explanations are explored in this paper.
The next section briefly describes the data. Section 3 then examines the correlation between the local board's discount rate recommendation and the bank president's FOMC vote. The discount rate recommendation is shown to add information to the explanation of the bank president's FOMC vote even when the relevant national and regional data are included. No obvious omitted macrovariable accounts for this result. Section 4 examines the possible sources of the discount rate recommendation's effect on the presidents' FOMC votes. The evidence suggests that the district bank's board of directors does influence, but does not control, the FOMC vote of the bank's president. Section 5 concludes.
The FOMC votes of district presidents and the discount rate recommendations of the regional boards are merged with data describing the current and expected future state of the economy. The FOMC votes were recovered from the minutes of the FOMC meetings, published approximately six weeks after each gathering. These minutes, and particularly the directive, outline the policy adopted and the vote of each FOMC member on that action. The wording of the directive has evolved over time; thus, at certain times it was easier to glean the course of monetary policy from the directive than at others.  Once the course of monetary policy is translated from the directive, judging the monetary policy action voted by each FOMC member is straightforward. When a member dissents from the chosen policy, the dissent is explained and the desired policy articulated. At any one meeting, seven governors and five presidents are permitted to vote, so in general 12 votes are registered. Finally, it should be emphasized that the direc tive provides only the direction of policy--either to tighten policy, loosen it, or keep it constant--and does not give the magnitude of any policy change. As a result, the dependent variable is discrete and trichotomous.
The data on the discount rate recommendation for each bank back to 1974 were retrieved from the discount rate minutes of the Federal Reserve. Every week the Board of Governors meets to consider action on the discount rate. If a recommendation is in, and it is in the direction that the Board of Governors desires, the members can vote to alter the rate. The minutes of that meeting provide information on any changes in the discount rate and on which banks recommended what change at the time of the meeting.
Several problems arise when merging data on each bank president's monetary policy vote with his or her board's discount rate recommendation. The district bank's discount rate recommendation is updated every two weeks. The FOMC, on the other hand, met roughly once a month prior to 1980 and has met eight times a year since. The higher frequency of the discount rate series must be altered to conform to the FOMC frequency. Since this paper examines the effect of a bank's discount rate recommendation on the bank president's FOMC vote, only the recommendation in at the time of the FOMC meeting is analyzed. Furthermore, discount rate recommendations made during periods when the district bank president was not a voting member of the FOMC cannot be used to examine the effect of these recommendations on the president's FOMC vote. Even though a discount rate recommendation is in, the district president's reaction to that recommendation can be quantified only when he or she votes at the FOMC.
The discount rate recommendations and the FOMC votes should, in general, be highly correlated since the Reserve banks' boards of directors and the members of the FOMC are reacting, certainly in part, to the same economy. Thus, when examining the effect of any variable on the monetary policy votes of FOMC members or on the local boards' discount rate recommendations, it is necessary to account for the state of the economy at the time these actions were taken. Since monetary policy works with long lags, changes in monetary policy should be determined by expectations about the future state of the economy. The expectations of the district presidents and their boards are instrumented for using the economic forecasts of the Federal Reserve Board staff, and these are circulated immediately prior to every FOMC meeting in the "Green Book."  Contained in the Green Book are Reserve Board staff forecasts of real gross national product (GNP) and its components as well as the unemployment rate and several measures of i nflation. Since the discount rate minutes are spotty before 1974 and the Green Book forecasts become available to the...