Analysis: Recent Reserve Bank Picks Boost Consensus at the Fed

By Nick Timiraos Features Dow Jones Newswires

The appointment of Thomas Barkin, a McKinsey & Co. executive, to lead the Federal Reserve Bank of Richmond reinforces a gradual and subtle shift among central bank officials away from dissenters and toward consensus.

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Mr. Barkin succeeds Jeffrey Lacker, who frequently voted against the Fed's monetary policy decisions, typically because he favored higher interest rates than the majority or because he opposed other easy-money measures adopted since the financial crisis -- positions that made him a "hawk" among central bankers.

Mr. Barkin hasn't publicly expressed his monetary policy views, but he is expected to be less hawkish than Mr. Lacker, according to a person familiar with the situation.

Two other hawkish dissenters, former Fed bank presidents Charles Plosser in Philadelphia and Richard Fisher in Dallas, were succeeded in 2015 by Patrick Harker and Robert Kaplan, respectively, both of whom fit within the widening center of the central bank's policy voices.

"The ideological presidents have been replaced by someone less extreme," said Aaron Klein, an economic studies fellow at the Brookings Institution and director of its Center on Regulation and Markets.

The reserve banks, working more closely than they have in the past with the Fed's board in Washington, have selected new leaders who don't have strong preconceived views about how the economy operates. Fed banks in Atlanta and Minneapolis also have selected new presidents in the past two years.

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Messrs. Harker and Kaplan, along with most other Fed officials, support the consensus forged by Chairwoman Janet Yellen in favor of slowly and cautiously reversing the central bank's extraordinary postcrisis stimulus measures as the economy improves.

The central bank has raised its benchmark short-term rate by just 1 percentage point in four steps over the past two years, and is likely to lift it again next week, to a range between 1.25% and 1.5%.

The new centrist Fed presidents could provide a source of policy stability during a wave of turnover in the central bank's top ranks. The New York Fed is planning to hire a new president by next summer. President Donald Trump has nominated Fed governor Jerome Powell to succeed Ms. Yellen in February, and will have her slot to fill when she retires then. The president also has filled one seat and has three other openings on the seven-member board of governors.

While the governors are nominated by the president and confirmed by the U.S. Senate, the presidents of the 12 reserve banks are selected by members of each institution's board of directors, subject to approval by the Washington-based Fed board.

The increase in centrist bank presidents has no clear cause, but observers point to some possible contributing factors.

First, over the past decade, the Fed's board has gradually asserted a more active role in the process of selection of the bank leaders. This includes ensuring that the search committees at each bank canvass the nation for candidates of different backgrounds, according to people familiar with the matter.

For years, it was common for regional banks to promote from within. "The process has tended to favor insiders," said Mr. Klein.

For the past four years, Mr. Powell has been the Fed's point person in managing relationships with the reserve banks, including handling the presidential searches.

The board hasn't concerned itself with the policy views of the candidates, these people said. But it keeps tabs on how the search is progressing, and the reserve bank sends one finalist to meet with governors for their signoff.

Second, the 2010 Dodd-Frank financial-overhaul law changed how the reserve banks pick their presidents by excluding from the process the banks' board directors who work for financial institutions. The change enhanced Washington's influence in an indirect way, since half of the remaining bank directors are selected by the Fed board.

Those changes make it "perhaps less surprising that there's a centrist feel to formerly hawkish reserve banks," said Sarah Binder, a political scientist at George Washington University and author of a book on the Fed. Still, given the opacity of the search processes, "it's hard to disentangle the potential influences here," she said.

Third, several of the dissenters of the past were outliers among their colleagues, wielding little influence in the policy discussions. At a time of low inflation and with less opposition to the Fed's unconventional policies, some of the reserve banks might prefer a leader who will be more relevant, said Ms. Binder.

"Hawks are out of fashion," she said.

The removal of bank directors from the search committees might also be behind a shift away from economists being selected to run the reserve banks, said Julia Coronado, an economist and founder of advisory firm MacroPolicy Perspectives LLC. Just one of the last five new presidents tapped to lead a reserve bank is an economist.

"If you're a CEO of an industrial company or a hospital, you may be inclined to weight that economic expertise less heavily in your search process," said Ms. Coronado.

The Fed board became more involved in the process in part because it has caught flak from lawmakers and others over the lack of diversity within the Fed system.

Those efforts appear to have paid off with the selection this year of Atlanta Fed President Raphael Bostic, an economist, housing policy expert and the first African-American to lead a reserve bank. His views place him within the Fed's policy consensus as well.

The Fed drew criticism for its other recent selections. All three reserve presidents hired in 2015, at the Minneapolis, Dallas and Philadelphia Fed banks, either worked for or had previous ties to Goldman Sachs Group Inc.

At his Senate confirmation hearing last week, Mr. Powell said he was committed to improve diversity within the system. "We make better decisions when we have diverse voices around the table...and that's something I've been deeply involved in during all my time there," he said.

Joann S. Lublin contributed to this article.

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

(END) Dow Jones Newswires

December 06, 2017 06:14 ET (11:14 GMT)