Mester Named President of Cleveland Fed Beginning June 1

The Federal Reserve Bank of Cleveland announced the appointment of Loretta Mester, the research director of the Philadelphia Fed, as its next president effective June 1.

Mester will replace Sandra Pianalto, who plans to retire May 31, according to an e-mail statement today from the Cleveland Fed. She will assume Pianalto’s voting seat on the policy-making Federal Open Market Committee and become the supervisor of banks including PNC Financial Services Group Inc. in Pittsburgh and KeyCorp in Cleveland.

The leadership change coincides with a transition in personnel and policy at the central bank. Janet Yellen was sworn in as Fed chair on Feb. 3 and is leading a gradual tapering of monthly bond purchases that have pushed the central bank’s balance sheet to $4.1 trillion.

The Fed is also awaiting Senate confirmation of three nominees for governorships: former Bank of Israel Governor Stanley Fischer, who would also serve as vice chairman; former U.S. Treasury undersecretary Lael Brainard; and Fed Governor Jerome Powell, who has been reappointed to a second term.

Mester, 55, may be especially concerned about long-run price stability, given that she served as top policy adviser to Philadelphia Fed President Charles Plosser, an opponent of bond purchases by the Fed, said Bob Eisenbeis, a former director of research at the Atlanta Fed.

Policy Pragmatist

“Her views would be probably a little more on the concern on inflation side, relative to the employment situation, but she’s a pragmatist,” said Eisenbeis, the vice chairman and chief monetary economist for Sarasota, Florida-based Cumberland Advisors. “If she had radically different views it would have been awfully difficult for her, being director of research for Charlie Plosser.”

Plosser also votes on monetary policy this year. As his top adviser, Mester often attended meetings of the FOMC and oversaw 65 people at the Philadelphia Fed including economists, analysts and their support staff. She became director of research and top policy adviser at the Philadelphia Fed in 2000. In 2010, she also became an executive vice president.

She has spoken publicly on monetary policy, including a March 1, 2013, presentation at Princeton University that looked at how central banks should respond to financial instability.

Similar Crisis

The Fed needs “to consider whether and how monetary policy and financial stability policy can be used to reduce the chance of a similar crisis in the future,” she said, according to slides from her remarks on the university’s website. “Imbalances can build up even in a low-inflation environment.”

Referring to the identification of asset price bubbles, she said economists “must remain humble.” It’s “very difficult to know when a bubble is forming -- best we might be able to do is monitor credit growth, leverage, spreads, reliance on short-term funding,” she said.

Mester may not be quite as strident about inflation risks as Plosser, and may tend toward centrism, said Joel Naroff, president of Naroff Economic Advisers Inc. in Holland, Pennsylvania, near Philadelphia.

“Loretta is a very good economist who, at least in my experience, comes at an issue based on a combination of theory and data,” Naroff said. “She does not appear to be a hard-core theorist of one type or another and is likely to be more of a centrist.”

‘Pathbreaking Work’

Mester’s distinction in research is “pathbreaking work on economies of scale and scope in banking,” Eisenbeis said.

She has written several papers on the topic. In September 2010, just a few months after the Dodd-Frank Act was passed, she published an essay in which she favored forms of capital tax on systemically-important banks rather than caps on size.

“A better solution than legislative limits on bank size is to develop a credible resolution mechanism coupled with other reforms, including revised capital requirements that involve contingent capital and capital charges based on the firm’s contribution to systemic risk,” she said in the essay, published on the Philadelphia Fed’s website.

The Fed has used the annual stress test to nudge the biggest banks toward higher capital levels, and is now formulating a series of capital surcharges for banks whose failure could affect the entire financial system.

Bank Supervision

Mester will be responsible for supervision of banks in her district, including Pittsburgh-based PNC, Cincinnati-based Fifth Third Bancorp and Cleveland-based KeyCorp. All three banks participate in the Fed’s annual stress tests.

As Cleveland Fed president, she will vote every other year on monetary policy, rotating with Chicago Fed President Charles Evans. Her district oversees Ohio, western Pennsylvania, eastern Kentucky and parts of West Virginia.

“The Cleveland Fed is an institution with great strengths including its outstanding research on inflation measurement and forecasting, its contributions to financial stability analysis, and its innovative work in U.S. Treasury revenue collections,” Mester said in a statement.

“Loretta is a distinguished and widely respected economist and leader,” Christopher M. Connor, deputy chairman of the Cleveland Fed’s board of directors and chief executive officer of Sherwin-Williams Co., said in a statement.

Connor, who led the Cleveland Fed’s search committee, cited Mester’s “deep expertise and broad understanding of economics, finance, financial intermediation, and banking issues.”

Mester graduated from Barnard College in New York and earned her doctorate in economics from Princeton in New Jersey, writing her thesis on industrial organization.

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