In talking with some of my Fed-watching friends, it appears the world’s most important central bank is about to experience some potentially profound changes—not just in personnel but more importantly in the kind of people who lead it.

Those changes could, in turn, have some serious economic impacts, so it’s worth taking a deeper look.

But before we get into the impending changes at the Fed, let’s quickly review how the organization works.

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Jerome Powell
By Federalreserve (powell_jerome_060512_8x10) [Public domain], via Wikimedia Commons

How the Fed Works

For some of you this review will be too elementary, but even many sophisticated investment people really don’t have much understanding of the inner workings of the Fed.

The Federal Reserve System consists of the Federal Reserve Board of Governors, which is a federal agency, and 12 regional Federal Reserve Banks. The Fed banks are “owned” by the member commercial banks in their district, but the Board of Governors appoints one-third of their directors.

The Board of Governors itself has seven members, all appointed by the US president to 14-year terms. The terms overlap, so by original design no one president should have too much influence on the board’s composition.

However, nothing requires governors to serve their full terms, and many do not. That arrangement seems to have created a perfect storm of sorts, at least for President Trump.

Trump Might Appoint the Entire Fed

Trump may get to appoint as many as seven governors next year.

Trump has the opportunity to shake up the Fed—if he chooses to. Or he can stick with the usual choices. Here’s hoping he doesn’t.

When Trump took office, the Board of Governors had two vacancies and five members: Janet Yellen, Stanley Fischer, Lael Brainard, Jerome Powell, and Daniel Tarullo.

Fischer and Tarullo both resigned this year. The Senate confirmed Randal Quarles as a board member and as vice-chair for supervision. So that leaves the membership at four as of now.

Note that Quarles is not taking Stanley Fischer’s vice chairman of the Federal Reserve position. That nomination is still open. There is the possibility that a brand-name economist could take that position. Would John Taylor be willing to be vice chairman? Inquiring minds want to know.

The president chose not to renominate Yellen to another term as chair. She could have stayed on as a board member but has said she will retire when the Senate confirms Powell as the new chair.

Powell is already on the board, so elevating him to chair doesn’t change the number of members.

This week the president nominated economist Marvin Goodfriend to one of the vacant Board of Governors seats. Goodfriend is controversial, so getting him through the Senate could take some time. I’m guessing it will be March or even later before he’s confirmed.

But the flip side is, he is Trump’s pick.

So somebody should tell the Senate to go ahead and do its job and don’t leave the Fed with just three Board of Governors members by the middle of February. And then somebody should tell Trump to get busy nominating at least two more members.

The Fed Left with Three Members

Sometime in January or by February 3, the Board of Governors might drop to only three members: Powell, Brainard, and Quarles. There’s an outside chance it could drop to two, since Quarles holds a partial term that ends January 31, 2018.

How does a seven-member board operate with four vacancies? Is that even a quorum?

Well, yes, technically it is. Back in 2003 the Board of Governors amended its rules to stipulate that a simple majority of the current membership constitutes a quorum. With three Senate-confirmed governors, any two can meet and make decisions.

This amendment was created in reaction to 9/11, when the governors realized that bad things can happen and that people in leadership positions need to be able to make decisions.

But simply making decisions is not the same as making the right decisions. In talking to former governors I’ve met over the years, I’ve gathered that they divide the workload so various issues can get the board-level attention they need.

That division of labor gets harder when there are fewer governors. The result may be either poor decisions or long delays in getting anything done.

So it’s best for everyone that the board get its full complement back. Yet President Trump—who could have nominated two governors the day he took office and two more replacements this year—has had only Randal Quarles confirmed and has simply promoted Powell, who was already there.

Marvin Goodfriend will take one of the other three vacancies, leaving two open seats once Yellen retires (more on Goodfriend below). By filling those positions, Trump will put his stamp on the Federal Reserve Board. What an amazing opportunity—if he will seize it.

Carpe diem!

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Sharp macroeconomic analysis, big market calls, and shrewd predictions are all in a week’s work for visionary thinker and acclaimed financial expert John Mauldin. Since 2001, investors have turned to his Thoughts from the Frontline to be informed about what’s really going on in the economy. Join hundreds of thousands of readers, and get it free in your inbox every week.