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Analysis

Fed personnel carousel in full swing

by Darrell Delamaide

Despite the recent US government shutdown and the Federal Reserve remaining in limbo, the economy continues to surge ahead, powered by tax reform, deregulation and improved business and consumer confidence.

Jerome Powell had to be renominated as the next Fed chair, since his nomination did not come up for a vote in the Senate before its session ended in 2017. Then he had to be reapproved by the banking committee, but his confirmation by the full Senate quickly followed before Fed chair Janet Yellen’s term expired at the beginning of February.

Good foil
Speculation over a new vice-chair continues. John Williams, the San Francisco Fed chief, is the latest contender. A long-time aide to Yellen when she headed the regional bank, Williams is an economist and therefore a good foil for Powell, whose background is in law.

Williams has turned hawkish of late and in January described the three rate increases on the agenda for 2018 as a ‘good starting point’. He said growth should be faster this year than originally forecast but there are no signs of wage-driven inflation. ‘It could be a little bit quicker pace of increases,’ he said, ‘but I don’t see any kind of game-changing shift in strategy.’

In a separate newspaper interview, he said the chances were greater that faster growth would prompt four rate increases rather than pulling back to two. He is relatively sanguine about the possibility that deficits resulting from tax reform could become a drag on growth. As a voting member this year, Williams will have his say whether he gets the vice-chair nomination or not.

Philadelphia Fed chief Patrick Harker, who leans hawkish, sounded dovish when he suggested that just two interest rate hikes might be more appropriate in 2018 if inflation continues to be soft.

Fed policy-makers are looking for a new normal after a decade of crisis management. Boston Fed chief Eric Rosengren has suggested the Fed should adopt a more flexible inflation target. With unemployment still declining, he worries that a surge in inflation would prompt the Fed to slam on the brakes to keep to its 2% inflation target, risking a recession.

Trump’s third nomination to the Fed board is Marvin Goodfriend, an economics professor at Carnegie Mellon University. The former research director at the Richmond Fed, who is a well-known monetary policy scholar, has pledged to increase transparency and accountability at the Fed.
The New York Fed is searching for a successor to William Dudley, who will step down as president in mid-2018, before his term expires in 2019. There is considerable pressure to keep the search for the second-most important policy-maker on the Federal Open Market Committee broad and transparent.

Unlike the board of governors, whose members are nominated by the president and confirmed by the Senate, the presidents of the regional banks are chosen by the board of each bank, subject to approval by the governors in Washington. The three banking members of the regional boards don’t get to vote on the president, leaving it to the three industry representatives and the three ‘public’ representatives to make the choice.

Increase diversity
The powerful New York post — the president is vice-chair of the FOMC — has always been filled by a white male, and the Fed has been under pressure to increase diversity.

Raphael Bostic, who became head of the Atlanta Fed in June, is the first ever African-American to head one of the regional banks. One of the rumoured candidates for the New York job, former Pimco chief executive Mohamed El-Erian, was born in New York to an Egyptian father and French mother, and grew up partly in Egypt and Europe. Minneapolis Fed chief Neel Kashkari was born in the US to immigrant parents from India. 

Darrell Delamaide is a writer and editor based in Washington.

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