NY Fed President, The Process
Of equal importance to the final decision of the next New York Fed President is the process by which this decision was made. Today we unwind that complex process. As always, I can be reached for comments, feedback, or questions on twitter or via my website www.thebanksterpodcast.com.
I am Alexander Bagehot and you’re listening to The Bankster Podcast, the only podcast dedicated to the fascinating and ever more consequential world of central banking.
A change in the guard of any institution is always accompanied with an invitation to take a look into the heart of an organization. The last year at the Federal Reserve has seen a lot of such changes, and I’d argue that the full change of the guard will be complete with the replacement of the current President of the Federal Reserve Bank of New York. In November Bill Dudley announced that he would be retiring from his post as leader of the New York Fed in the summer of 2018. On today’s episode I’m hearkening back to the roots and foundation of The Bankster Podcast - summarizing, translating, and explaining the complexities of the Centralverse. Today’s complexity - the NY Fed Presidential selection process.
This episode is especially timely, not only due to the announcement of its conclusion just a few days ago, but also because the process was scrutinized and questioned more fiercely than in the past. So first I will break down the process and then I’ll end the episode by pointing out the two biggest complaints and a few of the proposed amendments to the process.
NY Fed’s official description
Remember that the “Federal” in Federal Reserve System comes from the combination of centralized, government appointed leadership in Washington DC (7 of them) and the somewhat independent Reserve Banks (12 of them) spread geographically across the country. These somewhat independent Reserve Banks are chartered similarly to that of a regular corporation. There is a Board of Directors, chosen in part by the shareholders of the Reserve Bank. The Board of Directors, in turn, choose the Executives. So when, back in November, Bill Dudley announced he’d be leaving his post as President of the New York Fed we turned to the Board of Directors. As outlined in the Federal Reserve Act (most recently amended by the Dodd Frank financial reform act of 2010) there are to be 9 directors at the Reserve Bank. They break down, at the New York Fed, as follows.
9 directors, broken up into three classes: A, B, C. And there are two characteristics that distinguish each of the three classes: (1) who chooses them and (2) who are they to represent.
A = Three Bankers chosen by the local banks.
CEO of Morgan Stanley (chosen by the large banks, representing the banks)
Chairman of Valley National Bank (chosen by the medium size banks, representing the banks)
CEO of Solvay Bank (chosen by the small banks, representing the banks)
B = Three leaders from the public to represent the public chosen by the local banks. (agriculture, commerce, industry, services, labor and consumers)
C = Three leaders from the public to represent the public chosen by the Board of Governors.
So those nine directors make up the Board of Directors of the NY Fed.
The three bankers from Class A (bankers chosen by bankers) don’t get to participate at all
Eligible Class B (meaning those public leaders chosen by bankers with no conflict of interest) and all Class C Directors (public leaders chosen by the Board of Governors) can participate
The eligible Class B and the Class C then choose who will be on the committee
They initially chose 4, 2 Class B and 2 Class C (now down to 1 Class B and 2 Class C)
Then the Committee goes to work
“Looking for Technical and Personal” in video introduction “listening to communities, not just candidates”
External search firms - for example the NY search committee selected two search firms
Committee sent their pick, John Williams, to responsible Directors (The six Class B and Class C Directors - really just 5 at this stage)
Responsible Directors voted in favor of John Williams, whose name was then sent to BOG for final approval
The final step, as outlined in the Act says, the appointment of President is made, “With the approval of the Board of Governors of the Federal Reserve System” (4.4.6).
In regards to what that “with approval” actually means, Peter Conti-Brown, one of my favorite Fed commentators tweeted, “It’s a maddeningly ambiguous legal structure that sometimes means rubber stamp and sometimes means BOG control. We could use some clarity.” (tweet)
In that vein, Reuters reported on March 1st that, “Powell was playing a larger role than his predecessors in making his views known to the...New York Fed…noting he... stressed monetary policy expertise and...discussed specific names.” link
So although I am not privy to the inside conversations that took place within the walls of the Fed or with those who they interviewed; I can say that the conversations took place within the selection process framework that I’ve outlined here.
Two camps of complaints:
John Williams is another older white guy
Self inflicted wound by the committee making such a big statement about seeking for diversity.
He doesn’t have market experience
Damned if you do damned if you don’t
Recommendations for changing
Release candidate list
Testify before Senate (Elizabeth Warren)
Be confirmed by Senate
Be presidentially appointed, senate confirmed
And that’s a wrap. I hope you were able to keep up today. There was a lot of information, and the process is anything but clear and concise. But of equal importance to the actual final decision is the process by which this decision was made. So when you hear about the outgoing or incoming President of the New York Fed, John Williams, you will now have some background on what went on behind the scenes for him to be selected.
And speaking of explaining the complicated aspects of the Centralverse, I have some excited news. My brother and I have been hard at working creating the next chapter in the journey that began almost exactly two years ago with the first episode of this podcast. The next chapter will be found on www.centralverse.org. The site is still under construction, and that’s pretty much all you’ll see if you go there now. However, if you want early access to the Beta version, send an email to firstname.lastname@example.org. I’ll be announcing updates to the website here on this podcast at the end of each episode going forward. I’m super excited about what we’re doing there, and I know that it will serve as an excellent resource and tool for all of you Fed Watchers and anyone interested in understanding how the world works in general.
Today’s episode was written, edited, and produced by me, Alexander Bagehot. Go to www.thebanksterpodcast.com to sign up for the show notes and get in touch with me directly. Thanks to all of you for listening, and I’ll see you next time on The Bankster Podcast!