Tricky Balancing Act Faces New York Fed Search Committee -Update

By Nick Timiraos Features Dow Jones Newswires

Help Wanted: A senior executive with a keen knowledge of markets and economics, but who isn't too close to Wall Street because he or she will be responsible for regulating some of the world's biggest banks.

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This is the balancing act facing a newly formed search committee for the next president of the Federal Reserve Bank of New York following the announcement Monday that the current leader, William Dudley, will step down in mid-2018, several months before his term expires in January 2019.

The New York Fed president is a voting member of the Federal Reserve committee that sets interest rates and other monetary policies aimed at keeping the economy on track. The chief also runs the Fed bank that works with the markets to implement these policies and which supervises some of the nation's biggest financial institutions.

The new president would take over an institution more intensely scrutinized since the financial crisis, and criticized by some lawmakers and others as a lax supervisor before the turmoil and too slow to get tough afterward.

The search for Mr. Dudley's successor adds to an extraordinary degree of churn in the central bank's top ranks. President Donald Trump last week nominated Fed governor Jerome Powell to succeed Fed Chairwoman Janet Yellen when her term expires next February. Last month, Fed Vice Chairman Stanley Fischer stepped down from his post. Mr. Trump has three open seats to fill on the board and could have a fourth if Ms. Yellen decides to leave after her term as chairwoman ends.

Already, the Senate has confirmed Mr. Trump's first board nominee, Randal Quarles, to the position of vice chair of bank supervision. If Ms. Yellen departs, every governor except for Lael Brainard would be in their current job courtesy of Mr. Trump.

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There is no example in modern Fed history of a new chair, vice chair and New York Fed president taking office within just a few months, said Peter Conti-Brown, a historian at the University of Pennsylvania.

"We're embarking on an unprecedented change of the guard within the Federal Reserve System," he said.

The closest example, he said, comes from the early 1950s, when William McChesney Martin Jr. launched a campaign to consolidate leadership in Washington, filling a vacant vice chair position and driving out New York Fed President Allan Sproul, but even that process took four years to complete.

"We're in uncharted territory," said Mr. Conti-Brown.

Because Mr. Powell, if confirmed by the Senate, would be the first Fed chairman in 30 years without a Ph.D. in economics, the New York Fed search committee could put a premium on a candidate with expertise in monetary policy. The search team might also focus on candidates with management experience, since the New York Fed president manages an institution of more than 3,100 employees, and with experience dealing with international markets and foreign central banks.

Candidates that might fit at least some of these criteria would include Simon Potter, head of the New York Fed's markets group; his deputy, Lorie Logan; and Brian Sack, an economist at hedge fund D.E. Shaw Group who held the job before Mr. Potter.

Other candidates who could receive consideration, according to analysts and other Fed watchers, include Ms. Brainard; former Fed governors Kevin Warsh and Jeremy Stein; Jan Hatzius, chief economist at Goldman Sachs; Seth Carpenter, chief U.S. economist at UBS; Sandie O'Connor, chief regulatory affairs officer at J.P. Morgan Chase & Co.; Jason Cummins, chief economist at hedge fund Brevan Howard and chairman of the Treasury Borrowing Advisory Committee; Diana Farrell, chief executive of the J.P. Morgan Chase Institute; Richard Clarida, an economist at Pacific Management Investment Co., or Pimco; Glenn Hubbard, dean of the Columbia Business School; Karen Dynan, an economist at Harvard University; Antonio Weiss, a former Treasury Department counselor; David McCormick, former Treasury undersecretary for international affairs; and Nathan Sheets, also a former Treasury undersecretary..

Mr. Trump won't have a hand in selecting Mr. Dudley's successor. While the seven Fed board members are nominated by the president and confirmed by the Senate, the 12 regional bank presidents are selected by the nonbank directors of each reserve bank, subject to approval by the Fed's Washington-based governors.

The New York Fed said it has formed a four-person committee of business and civic leaders to run the nationwide search. The co-chairs are Sarah Horowitz, a union organizer who founded the Freelancers Union, a nonprofit that provides health care and other benefits to independent workers, and private-equity investor Glenn Hutchins, who was an adviser to Bill Clinton's 1992 presidential transition team.

The search committee also includes David Cote, chairman of Honeywell who served as the firm's chief executive until March, and Denise Scott, a top executive at the Local Initiatives Support Corp., a nonprofit that specializes in community development.

Two other board members will join those four directors in voting on the committee's recommendations. One of those seats is currently vacant. The second is Charles Phillips, chief executive officer of Infor Inc., who was named as a director on Friday.

Before he ran the New York Fed's markets desk in 2007, Mr. Dudley was chief economist at Goldman Sachs, and concerns that Goldman has too much sway within the system has been amplified by the selections in recent years of other Goldman alums to run the Minneapolis and Dallas Fed banks. (A fourth Fed bank, Philadelphia, is led by an academic who had been a Goldman trustee.)

The choice of the New York Fed president "will be the second most important nomination within the Federal Reserve system after Powell's nomination for chair last week," said Michael Gapen, Chief U.S. economist at Barclays.

Write to Nick Timiraos at nick.timiraos@wsj.com

(END) Dow Jones Newswires

November 07, 2017 11:00 ET (16:00 GMT)