Filling top Fed jobs overshadows policy

Policy-makers turning more hawkish amid buoyant economy

Leadership positions at the US Federal Reserve are still overshadowing monetary policy as President Donald Trump’s administration slow-walks nominations to the board of governors in Washington, which has four unfilled posts.

The delays have allowed questions about diversity to catch up with the appointments. Three top leadership posts this year are all on course to be filled by white men. Jay Powell became chair in February and John Williams, the head of the San Francisco Fed, will take over the pivotal New York Fed post in June. Richard Clarida, a professor at Columbia University, is the rumoured candidate for the vice-chair post. As it stands, the top posts are 80% male and 87% white, according to reports from the Washington Post.

The New York regional bank plays a special role in the Fed system, executing all the transactions to put monetary policy into effect. Therefore, the bank’s president is a permanent voting member of the policy-making Federal Open Market Committee, like the governors in Washington. The other regional bank chiefs rotate into voting position every two or three years.

The choice of Williams was somewhat surprising, as the New York Fed president typically has more direct experience in financial markets. John Dudley, the incumbent, worked for Goldman Sachs for 11 years and was chief economist for the investment bank for most of that time. Williams is an academic economist who has spent most of his career at the Fed, first at the board of governors in Washington and since 2002 at the San Francisco Fed. It was evidently felt that his economic expertise was needed to complement Powell, the first non-economist to head the Fed in nearly four decades.

Williams’ shift to New York does not change the complexion of the FOMC. The San Francisco Fed will be looking for his replacement and will no doubt come under pressure to choose a woman or a minority candidate.

In the meantime, the surging US job market is tipping policy-makers towards accelerating monetary tightening. The March dot-plot graph of interest rate forecasts of the 15 policy-makers indicated that seven expect more than two more increases this year, up from just four in December.

Even the number expecting at least two more increases after March’s rate rise has increased. ‘On the heels of a strengthening outlook, I see two additional rate hikes this year as appropriate,’ said Patrick Harker, president of the Philadelphia Fed, at the end of March. Previously Harker had forecast just two increases for the entire year. He attributed his more hawkish stance to the impact of tax cuts.

The normally dovish Eric Rosengren, head of the Boston Fed, hinted that he had moved into the camp favouring four rate rises this year. ‘To keep the economy on a sustainable path, I expect that it will be appropriate to remove monetary policy accommodation at a regular but gradual pace – and perhaps a bit faster than the three one-quarter point increases envisioned for this year,’ he said ahead of the March meeting.

Powell’s first press conference as Fed chair was shorter than the longer sessions of his predecessor, Janet Yellen, and his answers often blunter. Some observers liked this. Others thought it made him look like an amateur.

Powell said he was considering holding a press conference after each of eight FOMC meetings each year, instead of the current four. Fed watchers believe the central bank won’t make any changes at meetings when there is no press conference to explain the move. The Fed has been unable to disabuse them of that notion, and in fact has only changed policy at meetings with a press conference. Making each meeting ‘live’ in this sense would follow the example of the European Central Bank.

The Fed chair played down the dot-plot graphs. ‘Like any set of forecasts, those forecasts will change over time,’ he said, ‘and they’ll change depending on the way the outlook of the economy changes. So, that’s really all I can say. It could change up. It could change down.’

Powell emphasised that the only tangible result from the meeting was the quarter-point increase in the federal funds rate. Even Neel Kashkari, head of the Minneapolis Fed, said afterwards he supported the move. Kashkari had dissented on three earlier rate rises because he felt there was insufficient evidence that tightening was warranted. He supported this most recent increase, however, to preserve the Fed’s credibility.

‘If I had been sitting in the chairman’s seat, I would have raised rates because we told the markets we were going to raise rates,’ Kashkari said. The rate increase ‘represented continuity with what the Federal Reserve said it was going to do’.

Darrell Delamaide is a writer and editor based in Washington.

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