A way to align the Fed more closely to Main Street

The Federal Reserve has an image problem in much of the U.S. beyond Wall Street. And that's the perception that the Fed is more aligned with Wall Street's interests than with Main Street's.

Here's one way to alter that perception. Federal Reserve Bank of Dallas President Richard Fisher recently proposed a change in the power balance of the committee that determines U.S. monetary policy, with the aim of giving the nation's regional Fed banks more power.

It's unlikely that the change he proposes will be implemented, but examining his plan is a useful way to see how the balance of power is centralized in Washington and New York -- and how that leads to the perception that financial interests on Wall Street have captured the Fed.

The Federal Open Market Committee (FOMC), which is in charge of monetary policy, has 19 members: the seven members of the Fed's Board of Governors in Washington, D.C., and the presidents of the 12 regional Fed banks. However, only a dozen FOMC members vote in a particular year. Those who vote are the seven members of the Board of Governors, the president of the New York Fed and four presidents from the other 11 regional Fed banks.

The New York Fed has a permanent place as a voting member because monetary policy operations are conducted on Wall Street through the New York Fed. The other four voting positions rotate yearly.

Thus, with their 12 votes, if the board members come to the FOMC meetings united, as they generally do, they have the majority and can control monetary policy. Further, if the New York Fed (which maintains a close relationship with the board) is also in agreement, the remaining regional banks will have only four of the 12 votes and little choice but to go along with what Washington and New York want to do, whether they agree or not.

Dallas Fed President Fisher wants to distribute power more evenly, and to head off congressional attempts to limit the Fed's independence. Under the Fisher proposal, the New York Fed would lose its permanent FOMC voting status, and the number of seats available for regional banks would increase from five to six. The New York Fed would be in the rotation along with the other 11 regional banks.

The Board of Governors would still hold a majority seven of the 13 seats, but the majority wouldn't be as large and the New York Fed wouldn't stand above the other regional banks.

Many people have lost faith in the Fed's commitment to Main Street, seeing it as more beholden to Wall Street. Like Fisher, they believe that the big banks and investment houses had far too much influence over the Fed during the financial crisis, undue influence that continues under the present institutional structure.

The Fed needs to change this perception and convince Americans that it really does have their best interest at heart. In the unlikely event that this or a similar proposal were ever implemented, it could help accomplish this goal.