John Williams, president of the Federal Reserve Bank of San Francisco, will reportedly be handed the job at the Federal Reserve Bank of New York. It may seem like a lateral move, but it’s definitely a promotion. New York Fed presidents have a permanent seat on the interest-rate-setting Federal Open Market Committee, making them the eighth Fed governor in all respects. The New York Fed also serves as the first line of defense against Wall Street’s powerful banking sector. And long-suffering Puerto Rico sits in the New York Fed’s district. For all these reasons, it’s one of the most important economic policymaking positions in the nation.
The vital nature of the appointment makes the outcome—and more important, the process behind it—so disappointing. While serving at the San Francisco Fed, Williams failed to detect the tsunami of scandal and fraud at Wells Fargo—and now will be rewarded with the lead supervisory role for a host of other big banks. Worse, working people were sidelined from input in the selection, which was instead dominated by banking interests and the current Fed chair. If we’re going to create an economy that works for everyone, we must break the stranglehold elites have maintained on central bank policy, who ensure that it has never truly represented the American people and their interests.
President Trump does not pick regional Fed presidents, and Congress plays no advisory role. It’s the New York Fed’s board of directors that was charged with replacing William Dudley, who announced his retirement last year. Before the Dodd-Frank financial reform law, all nine directors (including the three “Class A” directors who are officials at member banks) nominated a regional president. Dodd-Frank eliminated the Class A directors’ participation in the nominating process, but retained it for Class B directors, who nominally “represent the public” but are chosen by member banks. (Class C directors, also representing the public, are chosen by the Fed’s Board of Governors.) So banks hand-pick three of the six decision-makers with nominating power, and the nominees subsequently oversee the supervision of those same banks.
“Hand-pick” is the proper term. Class A and Class B directors are supposed to be elected among nominees chosen by member banks. But the ballots for the 2015, 2016, and 2017 New York Fed elections show only one candidate for each open slot, with no possibility for a write-in vote. These are backroom appointments arrived at by a consensus among the region’s banks.
That produces exactly the kind of directors you’d expect. The Class B “deciders” on the New York Fed board included David Cote, former CEO of defense contractor Honeywell. Cote abandoned his New York Fed director position last week to seek a job in the financial services industry, immediately after he actively participated in the search for the president. Another Class B director, Charles Phillips, was a managing director at Morgan Stanley for a decade, and now runs a software company; two-thirds of the shares in that company are held by Koch Industries.
Glenn Hutchins, the third Class B director, is a private equity billionaire specifically chosen by large “Group 1” banks. In New York, that includes most of the big banks operating in the United States—Citi, Morgan Stanley, Goldman Sachs, JPMorgan Chase, Deutsche Bank, HSBC. Hutchins also sits on the board of the Center for American Progress, and funds a project at the Brookings Institution that has provided sinecures for several outgoing Fed leaders—Ben Bernanke, Janet Yellen, and Donald Kohn. How a private equity tycoon handing out jobs to ex-Fed governors like candy truly represents “the public” at the New York Fed is anyone’s guess.
Hutchins somehow became co-chair of the New York Fed’s presidential search committee. There’s only one other example in recent memory where the Class B director, chosen by banks, gets the opportunity to run the search for the person who will supervise those banks. And that Class B director wasn’t running their own financial firm on the side.
This broken process led to three finalists for the New York Fed presidency: a longtime Citigroup executive, a finance industry lifer who blocked stronger financial reform while at the Treasury Department, and John Williams. And while the Fed’s Board of Governors is supposed to approve the regional president’s selection, in this case it appears to have influenced it as well. Fed Chair Jay Powell played an unusually large role in the New York Fed choice, according to the Wall Street Journal. Powell initially wanted Williams to be his vice chair on the Fed, and when that was stymied, he apparently slotted him in at the New York Fed.
Meanwhile, despite the activities of the Fed Up coalition of community and labor groups, demanding public input for working people who will feel the impact of the New York Fed’s policies, these groups had no voice in Williams’s selection. “The public clearly articulated what we wanted in a New York Fed president, and we were ignored,” said Shawn Sebastian, director of the Fed Up campaign. Activists wanted a president with diversity of identity and experience, someone who could credibly regulate Wall Street and commit to the full-employment policy the Fed is presumably charged with promoting, rather than putting inflation fears above jobs. Instead they got almost the polar opposite.
Every president in the history of the New York Fed has been a white male; Williams is no exception. He is a career Fed insider at a time when the central bank has missed inflation targets for years, and is currently tightening monetary policy before all working families receive the benefits of full employment. As far back as 2012, Williams worried about the unemployment rate falling below a “natural” rate of 6.5 percent; we’re at 4 percent today, with no sign of runaway inflation.
Williams keeps a $100 billion Zimbabwean note on his desk, a symbol of his commitment to the inflation half of the Fed’s dual mandate. While he has promoted the idea of “catch-up” inflation to make up for periods of lower price increases, as recently as last week he voted for an increase in interest rates, despite no real inflation pressures.
Worst of all, Williams did nothing to stop the reign of terror at Wells Fargo, which is headquartered in the San Francisco Fed’s district. We’ve known about Wells Fargo’s aggressive sales goals leading to fake accounts at least as far back as articles in the Los Angeles Times in 2013. Yet in 2015, Williams appointed Wells Fargo CEO John Stumpf to the Federal Advisory Council, which discusses bank policy with Fed governors. He re-appointed him in 2016, where Stumpf served right up until he resigned from Wells Fargo in disgrace.
Williams spoke about the Wells Fargo scandal last year as an example of the need to fix bank culture, rather than enforce the law. The San Francisco Fed allegedly opened an investigation into Wells in late 2015, but there’s no record of any follow-through, and no public reckoning with the clear supervisory breakdown on its watch. As Dennis Kelleher of the financial reform group Better Markets said in a statement, promoting Williams after the debacle at Wells Fargo would “reward failure and send the wrong message to the biggest banks in the country that the Fed really does not take bank supervision seriously.” And it’s not as if the New York Fed was seen as a strong supervisor of big banks to begin with.
The terrible selection process, in short, was destined to produce a bad result. Williams’s supporters can claim a sham “outsider” status for him in that he’s never worked in the finance industry, which is unusual for a New York Fed chair. His blind spots on Wells Fargo, however, hardly make him fit to lead a critical bank supervisor. Diversity of background and experience was tossed aside for another insider white male who doesn’t share the primary concerns of working people seeking a leg up in the economy.
Despite significant criticism, including from Senator Cory Booker, it may be too late to stop Williams’s appointment. But if the Fed wants to restore the slightest credibility, they could fix a governance process dominated by banking interests and elites, one that creates unconscious biases against inclusive policies. When the same kind of people manage the economy for decades, too many people who don’t look like them get left out.