Fed Governor Mishkin resigns effective August 31

By Mark Felsenthal

WASHINGTON (Reuters) - Federal Reserve Governor Frederic Mishkin is resigning effective August 31, the Fed said on Wednesday, leaving the central bank's board thinly staffed as it navigates the U.S. economy through a credit crunch and period of slow growth.

Mishkin said in a letter of resignation to President George W. Bush that he will return to his teaching post at Columbia University's Graduate School of Business in New York.

He joined the Fed board in September 2006 for a term ending in January 2014, but his family has remained in New York during his tenure.

"Rick's contributions to the intellectual underpinnings of monetary policy at the Federal Reserve have been invaluable," Fed Chairman Ben Bernanke said in a statement.

Mishkin's departure will leave the Fed's Board of Governors with three of its seven seats vacant. Bush has nominated two people to fill vacant spots and has tapped Gov. Randall Kroszner to serve a full 14-year term, but the Senate has not confirmed the nominations in an election-year standoff.

If the Senate does not approve any pending nominees by the time Mishkin steps down, as appears likely, the central bank would be operating with just four board governors for the first time since cabinet members and agency heads served as ex-officio members in the 1930s.

The normally seven-person board serves as the nucleus of U.S. monetary policy-making. Each board member regularly votes on interest-rate decisions, as does the head of the New York Federal Reserve Bank. The presidents of the Fed's 11 other regional banks vote on a rotating basis, with a total of five regional presidents voting at each rate-setting meeting.

The board make-up after Mishkin leaves would put governors named by the president and confirmed by the Senate in the minority among the voting members on the rate-setting panel.

Some analysts believe the regional presidents are more inclined to raise rates to squelch inflation, and less accountable to Congress, because they are not subject to the confirmation process.

The regional bank chiefs are chosen by boards of directors comprised of private-sector representatives, although the appointments are subject to approval by the Fed's Washington-based board.

"It probably does mean that on the margin, the board is probably going to be skewed a bit more to the hawkish side than they have been to this point," said Michael Hanson, an economist at Lehman Brothers in New York.

Mishkin's decision to step down comes not only as the central bank wrestles with a weak economy and surging prices for food and energy, but also as officials begin to consider changes to oversight of the financial system in light of the credit crisis sparked by rising mortgage delinquencies.

INTELLECTUAL FORCE

Mishkin's 24-month tenure on the Fed's board would be the shortest since Alan Blinder spent 19 months as Fed vice chairman from June 1994 to February 1996.

A prominent academic, Mishkin cut a wide theoretical swath as a Fed official. In recent speeches, he argued that the Fed should not prick asset price bubbles because interest rates are too blunt a tool. He also argued that policy-makers should not focus too heavily on energy price increases, because doing so could lead to an erratic money policy.

"His speeches have built an intellectual foundation for the policy framework that is currently being implemented," said Brandeis University finance professor Stephen Cecchetti.

"His views about asset prices, housing, core versus headline inflation ... and a myriad of other issues have had an impact on current policy and will have an impact on the future debate," Cecchetti said.

Mishkin has argued, like Bernanke, that Fed policy could be bolstered by a stated numerical inflation target. He co-authored a book on the subject with Bernanke, whom he has known for more than 25 years.

The Fed last November announced it would issue quarterly forecasts instead of two forecasts a year, and would make projections three years into the future instead of two, providing more information about the rate of inflation policy-makers deem acceptable. However, it stopped short of setting explicit inflation targets.

"He was obviously someone who was close to Bernanke," said Lehman Brothers' Hanson. "They had some common academic interests, similar policy outlooks. In some sense, Bernanke is losing an ally on the board."

Mishkin, a former research director at the New York Fed, began teaching at Columbia's Graduate School of Business in 1983. He began his academic career at the University of Chicago in 1976.

(Reporting by Mark Felsenthal; Editing by Dan Grebler)

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