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Fed Turnover Creates Possibility and Tension

Posted by Joseph Trevisani on Nov 13, 2017 9:17:19 PM

A week after President Trump named Jerome Powell as his choice to run the Federal Reserve once current Chairwoman Janet Yellen’s term expires in February next year, another long-time member decided to call it quits earlier than expected.  William Dudley, president of the Federal Reserve Bank of New York, announced that he will retire about six months earlier than scheduled.  Though the decision has been long-planned, the timing of this announcement is more closely scrutinized given last week’s announcement.   Just last month Vice Chairman Stanley Fischer stepped down with Trump’s first nominee, Randal Quarles, taking office on the seven-member board.  Should Ms. Yellen decide to leave after ceding the helm as chairwoman, her term as a board member does not expire until 2024, then there would be four open seats on the board.  Frankly, this is an unusual wave of turnover among the nation’s top monetary and regulatory financial decision-making body. 

The structure of the Federal Reserve should give investors some comfort.  Policy is decided by the Federal Open Market Committee (FOMC) which by law must meet four times a year.  Recently, they have met eight times a year with four meetings followed by a conference call with reporters.  The FOMC is comprised of the twelve voting members: the seven members of the Board of Governors and the presidents of five of the 12 Federal Reserve Banks.  The voting among the bank presidents rotates except for the president of the Federal Reserve Bank of New York which is a permanent voting member of the committee.  That is why Dudley’s departure is so key.  He, Yellen and Fischer worked quite closely over the past four years in steering the committee to adopt the current policy of moderate rate hikes coupled with an even more gradual shrinkage of the $4 trillion-plus balance sheet which ballooned in response to the global financial crisis.  When Dudley came under attack following the Great Recession for not reading the tea leaves sooner, it was Yellen who came to his defense saying 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.”  By the middle of next year, that triumvirate will likely be gone and replacing a president can take some time—the Richmond Fed’s top seat remains vacant eight months after former president Jeffrey Lacker resigned.  A search for Dudley’s successor will start immediately. 

Though Powell is likely to continue the policy stance and directives of Yellen, he is but one member on the voting committee and one voice among the 19 during the regularly scheduled meetings.  Because there is not as much turnover among the Fed bank presidents, there should not be any drastic changes in direction come next February.  Nevertheless, forming a working relationship with four new members of the board for Powell is going to take some time.  The New York Fed president’s position is powerful not only given its permanent vote position but the Fed conducts the open market operations—buying and selling of U.S. government and mortgage-backed securities in the secondary market—through the New York branch and its proximity to Wall Street confers further clout by proximity.  Thus, working closely with New York’s chief will be critical for Powell’s success.  It is one of the truths which makes running the Fed so hard.  In reality the chairperson has two bosses—the Wall Street banks which work closely with the Fed for day-to-day operations but also must be regulated and reprimanded on occasion and Washington, D.C. where the source of the Fed’s power lies wrapped up within the tumultuous and never straightforward world of politics.


Steigerwald, Gordon & Koch--Wealth Advisors   (used by permission) 



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