- Research shows financiers more likely to favor tighter policy
- Third of district Fed banks to be run by ex-Goldman bankers
Wall Street is again leading to the corridors of central banks.
From Minneapolis to Paris, investors and financiers are increasingly being hired to help set monetary policy less than a decade since the banking crisis roiled the world economy and chilled their public-sector employment prospects.
Academic studies of historical voting records at central banks suggest the new trend may mean an increased bias towards tighter monetary policy.
Last week’s appointment of Neel Kashkari to run the Federal Reserve Bank of Minneapolis as of January means a third of the Fed’s 12 district banks will soon be run by officials with past ties to Goldman Sachs Group Inc.
Kashkari also worked for Pacific Investment Management Co. and managed the U.S. Treasury’s $700 billion rescue of banks during the financial crisis.
The New York Fed’s William Dudley was Goldman’s chief U.S. economist for almost a decade before joining the central bank in 2007, while recently appointed Dallas Fed President Robert Steven Kaplan spent 22 years at Goldman and rose to become its vice chairman of investment banking.
Although Patrick Harker joined the Philadelphia Fed from the University of Delaware he also served as an independent trustee of Goldman Sachs Trust.
Fed Vice Chairman Stanley Fischer and Atlanta Fed President Dennis Lockhart both spent time working for Citigroup Inc. Fed Governor Jerome Powell worked as an investment banker early in his career for Dillon, Read & Co., which eventually became part of Switzerland’s UBS Group AG.
It’s not just the Fed. Bank of England Governor Mark Carney and European Central Bank President Mario Draghi both famously worked for Goldman before entering central banking, yet they have recently been joined by others with financial backgrounds.
The new head of the Bank of France, Francois Villeroy de Galhau, spent 12 years at BNP Paribas SA, becoming its chief operating officer in 2011. Meanwhile, in September, Gertjan Vlieghe joined the BOE’s Monetary Policy Committee from hedge fund Brevan Howard having also previously worked for Deutsche Bank AG.
So what does the re-emergence of financiers in the halls of central banks mean for monetary policy at a time when it’s set to diverge internationally?
A study of Fed transcripts from 1994 to 2008 published this month by economists at the central bank of Poland found that members from the financial sector were more likely to be more hawkish than those with experience in public sectors or other private work.
They also found that women and Ph.D holders tended to favor tighter policy, while those with prior experience of working at the central bank or who were appointed by a Republican president titled toward the dovish side.
The results “indicate that professional backgrounds matter for policy preferences and for the propensity to disagree,” wrote Hamza Bennani, Etienne Farvaque, Piotr Stanek.
That would seem to square with a 2013 study by economists Stefan Eichler and Tom Lahner. Using votes from 1992 to 2001, they concluded Fed officials with longer careers in the financial sector were more focused on inflation compared to those with experience of academia, government or industry, who monitored output more.
Meantime, a 2015 report by Bennani, who teaches at the Universite de Paris Ouest Nanterre La Defense, found ECB officials with a background in banking were “less likely” to call for the launch of government bond purchases.
By contrast, although a 2014 study of the Bank of England by Mark Harris, Paul Levine and Christopher Spencer assumed a background in finance meant a preference for tightening, they found it actually had “no significant effect” on voting.
The question for investors is whether the historical relationships still hold. They may not. Draghi is mulling more stimulus for the euro area, Carney this month signaled the U.K. still needs record-low interest rates and Dudley has proven to be one of the most dovish Fed officials.