Departure of Fed's Dudley Will Open the Door for a Hawk on FOMCBy
KC’s George expected to vote as alternate in FOMC reshuffle
Williams’ vote will not pass to interim SF president
The Federal Reserve’s policy-making panel is about to get a hawkish mid-year reshuffle.
The retirement of New York Fed President William Dudley on June 17 will trigger a series of events that ultimately shifts a vote on the Federal Open Market Committee to Kansas City Fed chief Esther George, possibly the most hawkish official among the current cast of U.S. central bankers. Last a voter in 2016, George favored an interest-rate increase at five of eight meetings. The committee raised rates only once that year.
To be clear, Dudley will be replaced as the head of the New York Fed, and as a permanent FOMC voter, by John Williams, who is currently president of the San Francisco Fed. Williams is already a voter this year because his bank holds a vote that rotates annually among San Francisco, Kansas City and Minneapolis.
When Williams departs for New York following the June 12-13 FOMC meeting, his San Francisco seat at the policy table will be taken by the bank’s current first vice president, Mark Gould. That will allow Gould a chance to participate in the discussion, but he won’t get to vote in the July 31-Aug. 1 FOMC.
That privilege will pass to George, who is the voting alternate to Williams in 2018, until San Francisco’s board of directors appoint a new president. They’re expected to soon launch a search to find their next chief, with the bank’s current head of research Mary Daly seen as a strong internal candidate, but these processes generally take several months and can drag on for longer.
Kansas City’s regular vote rotates back in 2019, giving George another year of raising her hand on FOMC decisions.
According to the FOMC’s Rules of Organization, the boards of directors in San Francisco, Kansas City and Minneapolis have the option of holding a special election after Williams departs to give Gould the 2018 votes instead of the alternate. Precedent, however, suggests they will not.
In the past 21 years there were at least three occasions in which a reserve bank president left office while holding a rotating vote. In all three instances -- in 1998, 2005 and 2006 -- the relevant boards of directors let the vote pass to the alternate until the vacancy was filled by a newly appointed president.
At the moment, George’s extra votes may not change the FOMC dynamic that much, according to Stephen Stanley, chief economist at Amherst Pierpont Securities.
“There are times when that could be really important,” he said. “Right now I don’t think there’s nearly as wide a gulf between the positions of Esther George and Bill Dudley as there might have been two or three years ago.”
That could change, he added, if inflation, which has been surprisingly tame despite a tight labor market, were to jump meaningfully above the Fed’s 2 percent target. The central bank’s preferred gauge for year-on-year inflation hit 2 percent in March after remaining below that threshold for most of the last six years.