Richmond Fed: Fed Dividend Cut Could Erode Fed’s Independence

In recent comments, Federal Reserve Bank of Richmond President Jeffrey Lacker challenged Congress’ decision to dramatically reduce the dividends the regional Federal Reserve banks pay to their member banks. “Tinkering with the Fed’s capital structure threatens to unravel the hybrid public-private governance framework that is so crucial to monetary policy independence,” he wrote.

Reflecting on the Fed’s history, Lacker pointed out that the Fed’s hybrid governance model — a board of governors appointed by the president and 12 regional banks with boards partly elected by member banks and partly appointed by the board of governors — plays an important role in limiting the role of politics in monetary policy, where the short-run political incentives can lead to inflationary policies that are hard to undo without independent decision-making.

Lacker noted that some current Fed members may leave the system with a reduced dividend. “Whether banks leave or stay and pay in less capital, this change could lead some to argue that banks’ role in Fed governance be reduced or eliminated,” he wrote. “This would dovetail with proposals to reduce the private aspects of the Fed’s public-private governance structure — for example, that Reserve Bank leadership be appointed by the U.S. president. This would be a grave mistake, in my view.”