New York Fed President Dudley to Announce Early Retirement -- 3rd Update

Federal Reserve Bank of New York President William Dudley is set to announce he will retire next year, around six months earlier than scheduled, and the announcement could come as soon as Monday, according to two people familiar with the matter.

The search for Mr. Dudley's successor will start immediately with the aim of finding a new president in mid-2018, after which time Mr. Dudley will retire, according to people familiar with the matter.

The decision has been long-planned and is unrelated to President Donald Trump's announcement Thursday that he would nominate central bank governor Jerome Powell to succeed Chairwoman Janet Yellen when her term as chief expires in February, according to a person familiar with the matter.

The coming announcement about Mr. Dudley was first reported by CNBC. The New York Fed declined to comment.

Mr. Dudley, who serves as vice chairman of the interest-rate-setting Federal Open Market Committee, is one of the central bank's top policy makers, and he has been a close ally of Ms. Yellen in recent years.

He also played a critical role in how the Federal Reserve responded to the financial crisis and its aftermath. Mr. Dudley played key roles in formulating policies to help the economy recover and has been very active in shaping the Fed's response to make financial firms more resilient to future troubles. He has also been an unusually vocal critical of Wall Street culture.

Mr. Dudley started at the bank in 2007, running the part of the institution that implemented monetary policy and dealt directly with financial markets. He got the top job when then-president Timothy Geithner left to become then-President Barack Obama's first Treasury secretary.

Mr. Dudley has been a strong supporter of the Fed's low-rate policies. But he has also been for some time a key voice arguing in favor of raising rates over the last year, even as inflation has proved unexpectedly weaker than expected, in turn calling into question the push to boost borrowing costs. It is possible that his replacement wouldn't see the same level of urgency to act.

Mr. Dudley has favored increases "in part because he gives more weight to the risk of financial overheating than to the need to get the inflation numbers right down to the last decimal place," said Louis Crandall, chief economist with Wrightson ICAP. "If his replacement has a more academic background, the replacement might be less willing to raise rates if the inflation numbers are still lagging in the second half of last year," he said.

Recent New York Fed leaders have all had strong connections to financial markets, and many expect any replacement would carry on that tradition. Possible contenders include Simon Potter, who now runs the New York Fed's markets desk, as well as D.E. Shaw's Brian Sack, who held that job before Mr. Potter.

Some close to the bank say there is also a chance it could be a current central banker. Dallas Fed leader Robert Kaplan, a former Goldman Sachs top executive, has deep market experience, as does the ambitious leader of the Minneapolis Fed, Neel Kashkari, who led the government's financial bailout efforts during the financial crisis.

The New York Fed is the most powerful of the central bank's 12 regional banks because of its role supervising some of the nation's biggest banks and implementing monetary policy. Mr. Dudley, a former Goldman Sachs chief economist who took over the New York Fed in 2009, is serving a term that ends in January 2019.

Mr. Dudley is scheduled to give a speech at the Economic Club of New York on Monday.

The news about Mr. Dudley's plan comes amid considerable churn in the top leadership ranks of the Fed.

Just last month, Fed Vice Chairman Stanley Fischer, another top Fed official and Yellen ally, stepped down last month and Randal Quarles, Mr. Trump's first nominee to the Fed board of governors, took office. Three other seats on the seven-member board are also open, giving the president an opportunity to remake its policy-making team.

A fourth seat on the board would open if Ms. Yellen decides to leave after ceding the helm as chairwoman. She could stay on as a governor, if she chooses, in a term that extends to 2024.

Mr. Dudley's exit gains in importance because Mr. Powell is not an economist by training. Mr. Powell may depend a bit more on central bank leadership to craft monetary policy.

"This is further change in an institution that was already experiencing considerable change," said Tim Duy, an economic professor at the University of Oregon. There has been a big question of "do we have enough intellectual firepower" at the Fed given all the recent leadership change, he said. Mr. Dudley's exit will remove a key thinker, in turn adding more uncertainty to future Fed policy, he said.

Several regional Fed banks that have seen their presidents exit in recent years have often found it to be a long process to replace their presidents. The Richmond Fed hasn't yet named a successor to former president Jeffrey Lacker, who resigned in April.

The regional banks' board of directors, who don't represent financial institutions regulated by the Fed, select new presidents, subject to the approval of the Board of Governors in Washington.

Write to Nick Timiraos at nick.timiraos@wsj.com and Michael S. Derby at michael.derby@wsj.com

The president of the Federal Reserve Bank of New York is set to announce he will retire next year, about six months earlier than scheduled, adding to an unusual wave of turnover among the central bank's top monetary and regulatory decision makers and ushering in new uncertainty about its policy course.

William Dudley's announcement could come as soon as Monday, according to two people familiar with the matter. The search for his successor will start immediately with the aim of finding a successor in mid-2018.

The decision has been long-planned and is unrelated to President Donald Trump's announcement Thursday that he would nominate central-bank governor Jerome Powell to succeed Janet Yellen when her term as chairwoman expires in February, according to a person familiar with the situation.

Just last month, Fed Vice Chairman Stanley Fischer stepped down and Randal Quarles, Mr. Trump's first nominee to the Fed's Washington-based board of governors, took office. Three other seats on the seven-member board are also open, giving the president an opportunity to remake its policy-making team.

A fourth seat on the board would open if Ms. Yellen decides to leave after ceding the helm as chairwoman. She could stay on as a governor in a term that extends to 2024.

All governors are nominated by the U.S. president and are subject to Senate confirmation. The regional Fed bank presidents are chosen by the members of their boards of directors who don't represent financial institutions regulated by the Fed, subject to approval by the governors.

The New York Fed president is traditionally one of the central bank's most powerful policy makers. This person serves as vice chairman of the rate-setting Federal Open Market Committee and leads the supervision of some of the nation's biggest financial firms.

Mr. Dudley, a former Goldman Sachs chief economist, started at the New York Fed in 2007, running the part of the institution that deals directly with financial markets to implement monetary policy. Many of his predecessors had markets experience.

If that tradition continues, contenders for the job include Simon Potter, who now runs the bank's markets desk, as well as D.E. Shaw's Brian Sack, who held that job before Mr. Potter.

Some observers close to the bank see a chance that its next president could be a current Fed official. Dallas Fed leader Robert Kaplan, a former Goldman Sachs top executive, has deep market experience, as does Minneapolis Fed President Neel Kashkari, who also worked at Goldman and led some of the government's financial-crisis rescue efforts.

Ms. Yellen, Mr. Fischer and Mr. Dudley worked closely together in recent years in deciding when and how to begin gradually reversing the Fed's crisis-era stimulus policies as the economy healed.

The trio advocated keeping short-term interest rates historically low to encourage hiring and growth, but also has nudged them gently higher since late 2015 to prevent the economy from overheating. They also crafted and launched the Fed's plan to shrink its large portfolio of bonds purchased since the crisis to provide extra stimulus.

The Fed has penciled in one more interest rate increase this year, and more through 2020 if the economy performs as expected. The coming changes in the top three leadership positions, combined with the recent pickup in economic momentum, raise uncertainty about the coming pace of rate increases.

The three officials also supported postcrisis measures to strengthen financial regulation and will be giving up their top posts just as the Trump administration is pushing for deregulation.

Mr. Dudley's planned departure marks "further change in an institution that was already experiencing considerable change," said Tim Duy, an economics professor at the University of Oregon. There has been a big question of "do we have enough intellectual firepower" at the Fed given all the recent leadership churn, he said.

The coming announcement about Mr. Dudley, 64 years old, was earlier reported by CNBC. The New York Fed declined to comment.

Mr. Dudley was long among the Fed "doves" who supported holding interest rates near zero for seven years after the crisis to help steady the markets and support the economy. But he also strongly supported nudging rates higher over the past two years to help keep the expansion on an even keel, even though inflation has run below the Fed's 2% target in recent months.

Mr. Dudley has said the Fed should continue gradually lifting borrowing costs to keep price pressures contained and prevent dangerous asset bubbles from forming.

Mr. Dudley has favored rate increases "in part because he gives more weight to the risk of financial overheating than to the need to get the inflation numbers right down to the last decimal place," said Louis Crandall, chief economist with Wrightson ICAP.

Mr. Dudley also was central in implementing multiple bond-buying campaigns, expanding the Fed's portfolio dramatically after 2009. He has since been a leading advocate for the slow, passive run-off of those holdings, which began last month with scarcely any impact on financial markets.

The New York Fed has devised new methods of managing the Fed's benchmark rate in an environment in which it maintains much larger liabilities. Mr. Dudley has been an outspoken advocate for maintaining a larger terminal balance sheet, an issue that hasn't yet been formally settled by the central bank.

Ms. Yellen and Mr. Dudley started the process of lifting rates and reducing the Fed's balance sheet "with no snafus, and that was not a trivial task," said Andrew Levin, a Dartmouth College professor and former Fed board staffer. "President Dudley deserves some of the credit" for what the central bank has done right, he said.

It hasn't always been smooth sailing. Under Mr. Dudley, the New York Fed faced repeated criticisms that it was too close to the private banks it supervises and failed to spot problems ahead of the crisis. After the crisis, the New York Fed, once the most feared banking regulator on Wall Street, lost power to the Washington-based board.

Mr. Dudley drew such heavy criticism from lawmakers in late 2014 that Ms. Yellen publicly defended him, saying that he had "done a fine job in running the New York Fed and I want to be very clear that I have great confidence in him."

Mr. Levin said he hopes the process to pick Mr. Dudley's successor will be more open to the public than similar searches in the past. "It can't be done purely behind closed doors and in back rooms. It should be done in a public way," providing some sense of who is being considered for the job, he said.

Write to Michael S. Derby at michael.derby@wsj.com and Nick Timiraos at nick.timiraos@wsj.com

(END) Dow Jones Newswires

November 05, 2017 19:13 ET (00:13 GMT)