March 26, 2018
Several press accounts have fingered John Williams, currently president of the San Francisco Federal Reserve Bank, to be the next president of the New York Fed. There are several reasons why this should be upsetting.
First, while the NY Fed had committed itself to an open process in selecting its new president, the turn to Williams seems to have taken place in the dark of night. He had not been mentioned as being one of the people in contention until just the last week.
It is also upsetting to see yet another white male picked for one of the top positions at the Fed so recently after Jerome Powell replaced Janet Yellen as chair. The president of the New York Fed, unlike the other Fed presidents, has a vote at every meeting. The New York bank president sits aside the chair and the vice-chair as one of the three most important members of the Fed’s Open Market Committee, which sets monetary policy.
The labor and community coalition Fed Up (with which I work) had submitted a diverse list of potential candidates to be considered for this position. The list included current and former Fed bank presidents and governors, members of the President’s Council of Economic Advisers, and heads of government statistical agencies. It appears that almost none of these people were even considered for the position.
An open process would have involved a public listing of names of people who were being considered and then a short list of finalists. This would have provided an opportunity for interested parties to assess the individuals’ qualifications and views. That is not what we saw here.
The selection of Williams specifically raises serious concerns about both his views on monetary policy and his responsibilities as one of the country’s most important financial regulators. Williams has repeatedly indicated a desire to raise interest rates and slow job growth, even when the economy was still far from full employment.
For example, in May of 2015, he said the economy was “nearing full employment” when the unemployment rate was still 5.5 percent. He said the same thing the following year when the unemployment rate was 4.7 percent. Last fall he complained that, “[…]we’ve not only reached the full employment mark, we’ve exceeded it.”
While Williams has thankfully modified his views as the unemployment rate has dropped without leading to inflation (in 2012, he put the floor for non-inflation unemployment at 6.5 percent), he has been all too willing to sacrifice jobs out of fears of inflation that proved to be unfounded. Had he been able to get the Fed to act based on his views, the unemployment rate today would almost certainly be considerably higher than its current 4.1 percent level.
This would mean that millions of today’s workers would be without jobs, with the losers being disproportionately blacks, Hispanics, and other relatively disadvantaged groups. In addition, the tightening of the labor market has allowed of tens of millions of workers at the middle and bottom end of the wage distribution to see real wage gains for the first time since the 1990s boom.
In addition to his problematic views on monetary policy, there are also grounds for being concerned about his effectiveness as a regulator. The New York Fed has responsibility for overseeing the Wall Street banks. Its failure to take this responsibility seriously was a major factor in the build-up to the financial crisis. (Timothy Geithner, who had been New York Fed bank president during the build-up of the housing bubble, famously once commented in subsequent congressional testimony that he had never been a regulator. A statement that was unfortunately close to being true.)
As President of the San Francisco Fed, Williams had responsibility for oversight of Wells Fargo, one of the country’s largest banks. Wells Fargo has been rocked by scandals in recent years, which eventually forced the resignation of its president and led to their being sanctioned by Fed chair Janet Yellen earlier this year.
While Williams may not have had the ability to prevent the violations for which Wells was sanctioned, he does not seem to have taken the issue seriously. He apparently did not try to prevent Wells CEO John Stumpf (who has since been forced to resign) from being appointed to the San Francisco bank’s advisory council in 2015 and then reappointed in 2016. The first major Wells scandal had been reported in the Los Angeles Times in 2013. Given this history, it is reasonable to question how seriously Williams would take his regulatory responsibilities as president of the New York Fed.
In short, both the process and outcome in this situation have serious shortcomings. This is likely to be bad news for people concerned about full employment and a secure financial system.
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