APPLICATIONS sought for leading Wall Street post. Perks: lovely office in Italianate palace; large staff. Duties: important role in setting interest rates (some vaguely defined other responsibilities). Requirements: eligibility for highest-level security clearance; tacit support in Washington, DC. Desirable but optional: broad knowledge of banking.
This week the New York Federal Reserve Bank announced that its president, Bill Dudley, will retire next year. He will leave a mixed legacy. He is thought to have given important help to Janet Yellen, the outgoing chair of the Federal Reserve. But he also presided over a steep decline in his institution’s influence over the banks that used to revere and fear it.
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Located in America’s financial centre, the New York Fed has powers not vested in the country’s 11 other reserve banks. Its president has a permanent seat on the Fed committee that sets interest rates. Its trading desk puts board policies into effect. And it is the regulator responsible for many of the world’s largest banks.
Historically, the president’s power has been magnified by a strong personality. The death of the first, Benjamin Strong, in 1928, is often cited as contributing to the financial mismanagement that led to the Depression. When Jimmy Carter’s presidency was threatened by rampant inflation, he turned for expertise to the New York Fed’s implacable president, Paul Volcker, making him Fed chairman. One of Mr Volcker’s successors in New York, Gerald Corrigan, was faced with the collapse of Drexel Burnham Lambert, a big investment bank, and demands to rescue it. He let it fail lest it seem that fecklessness might escape severe penalties.
That Darwinian era ended with the financial crisis. It exposed supervisory shortcomings and a lost appetite for allowing failures. The bank’s president at the time, Timothy Geithner, was elevated to treasury secretary, to be replaced by Mr Dudley, a Goldman Sachs economist who had joined the New York Fed in 2007 to run its trading desk. Crisis-induced legislation shifted much supervisory authority from New York to Washington, so some diminution in the president’s role was inevitable. But either because Mr Dudley felt it prudent to keep his distance from banks, or because his areas of competence and interest lay in the markets and not in the institutions, his voice lost its salience.
The committee charged with finding a new president has until the middle of next year to find a suitable successor. To avoid conflicts of interest, the committee excludes bankers, eliminating one source of expertise. Whoever it chooses may struggle to reverse the trend of the New York Fed’s declining influence. The challenge for the search committee may be not just to find a capable leader, but to work out a new role for the institution itself.
Source: economist
The New York Fed’s president announces his retirement