Two Federal Reserve Openings Provide One Chance to Counter Trump

Posted January 18, 2018 5:44 p.m. EST

WASHINGTON — The Federal Reserve is facing a significant change in leadership that goes beyond the installation of a new chairman. It is also awaiting the appointment of two other top officials who will play a crucial role in shaping Fed policy.

President Donald Trump, who has already nominated Jerome H. Powell as the Fed’s next chairman, also gets to pick a new vice chairman. But the other open position, the presidency of the Federal Reserve Bank of New York, is not Trump’s choice to make.

The New York Fed chooses its own president, a position that is often described as the second-most powerful at the Fed. The regional bank is responsible for implementing the Fed’s monetary policy decisions — raising or lowering interest rates through the purchase and sale of financial assets — and it oversees many of the nation’s largest financial institutions.

Some of Trump’s political opponents see an opportunity to fill that opening with a counterweight to the president’s economic agenda.

“The appointment of the next New York Fed president is the most powerful appointment in America that Donald Trump doesn’t control,” said Marcus Stanley, policy director of Americans for Financial Reform, which lobbies in favor of strong regulation. “Our job is making sure everyone knows the stakes of this appointment, and making sure their interests as working people are protected.”

It is unusual for the Fed’s top three jobs to change hands at the same time. Janet L. Yellen, the Fed’s chairwoman, plans to step down at the end of her term in early February, pending the confirmation of Powell. The Senate Banking Committee, which approved his nomination last session, did so again on Wednesday, clearing the way for a final vote.

The vice chairman job has been open since Stanley Fischer stepped down in October. And William C. Dudley, the New York Fed’s outgoing president, has said that he plans to step down this summer, once a successor is in place.

The Fed’s new leaders will take the helm during a period of relative tranquility. The economy is expanding and the Fed is in the middle of a slow-and-steady retreat from its post-crisis stimulus campaign. But there are significant long-term challenges, including a brewing debate about whether the Fed should adjust the way that it conducts monetary policy before the next downturn.

Krishna Guha, head of the central bank strategy team at Evercore ISI, wrote in a recent note to clients that Powell does not have a deep background in monetary policy or financial markets — and might benefit from the presence of lieutenants who do.

“For Powell to be effective, he needs the right leadership team around him,” wrote Guha, a former New York Fed official. He added, “While most decisions taken by even a Fed chairman are in the end not make-or-break, most Fed chairs face at least one profoundly consequential decision during their tenure.”

The Trump administration has discussed some vice-chairman candidates who could fit the bill, including Lawrence B. Lindsey, a former Fed governor and director of the National Economic Council under President George W. Bush, and Mohamed A. El-Erian, the chief economic adviser at Allianz, who is widely respected as both an investor and a commentator on monetary policy, according to a person who has participated in some of those conversations.

The White House has not said when it plans to announce a decision.

The New York Fed’s board of directors, which is at an earlier stage in its search, has said that it was focused on finding a technocrat who understood the bank’s work.

But technocrats come in many flavors, and there are signs that the New York Fed would like someone in the mold of Dudley or Yellen, both of whom have emphasized the effects of monetary policy on ordinary people.

“How monetary policy is considered seems very high-level for many people in the community, but it has a direct impact on how well they may do economically,” Denise Scott, a member of the four-person search committee, said in a video released by the New York Fed that described what it’s looking for in a candidate. Scott is executive vice president of the Local Initiatives Support Corp., a nonprofit that backs community development projects. The leaders of the search committee are Sara Horowitz, the executive director of a New York labor union, and Glenn Hutchins, a private equity executive who has long been a major donor to Democratic political candidates. The fourth member is David M. Cote, chairman of Honeywell International.

The committee has hired two search firms, one of which specializes in identifying a diverse field of candidates. It also made a point of meeting with a group of liberal activists, including labor unions and community development groups, in addition to the standard roster of banks and business officials.

The divergent selection processes are an artifact of the Fed’s structure: A board of political appointees in Washington oversees the operations of 12 regional reserve banks, which are privately owned by the commercial banks in each region. The New York Fed is owned by major banks including Citigroup and JPMorgan Chase as well as smaller community banks.

Although the regional reserve banks have lost much of their original autonomy, they retain the power to select their own presidents, subject to the approval of the Federal Reserve Board in Washington.

Monetary policy is made by a committee comprising the Fed’s governors and five of the regional presidents. The president of the New York Fed holds one of those votes on a permanent basis, a reflection of New York’s long-standing role as the nation’s financial center, and serves as the committee’s vice chairman. The remaining four votes rotate among the other 11 regional banks. While private ownership of central banks was once quite common, most developed nations have converted to fully public systems, and the list of holdouts is dwindling. Austria took ownership of all shares in the Oesterreichische Nationalbank in 2010. South Africa said in December that it would move to take full ownership of the South African Reserve Bank.

Andrew Levin, a Dartmouth economist and a former Fed official, said it’s past time to make the Fed a fully public institution, too. Levin has proposed that the federal government should take ownership of the regional reserve banks, and that the selection of regional reserve presidents should be a public process.

“This is one of the most important public officials in the United States and that person is being chosen by a private board of directors of a private institution,” he said, referring to the New York Fed’s current search.

But some liberal activists who, under the Obama administration, pushed for the government to take control of the reserve banks now see the New York Fed’s independence from Washington as potentially valuable.

Shawn Sebastian, director of the Fed Up campaign, a consortium of groups that lobbies the Fed to prioritize employment and wage growth when making monetary policy, said his organization is pushing for the New York Fed to make a statement with its decision.

“The next president needs to have a real and demonstrated commitment to full employment, by having worked for the public interest and low-income people in their career,” he said.