Turnover at Fed Banks Could Shape Policy

Power is changing hands within the Federal Reserve System.

William McDonough, president of the Federal Reserve Bank of New York, plans to retire in July. His post is unique among the 12 Fed banks because New York has a permanent vote on the policymaking Federal Open Market Committee. President since 1993, McDonough has been the liaison with Wall Street and the most influential Fed executive after Chairman Alan Greenspan. As of mid-February, a search committee had yet to name a successor.

McDonough, who turns 69 on April 21, will depart as several other Fed banks confront potential changes in their leadership.

In 2004, both J. Alfred Broaddus, president of the Richmond Fed, and Robert Parry, president of the San Francisco Fed, turn 65 and will have to step down unless the Fed waives its retirement rules.

Turnover at the top would open the door for new presidents to shape monetary policy and the legacy of Greenspan, whose term as chairman expires in June 2004.

A Fed bank’s influence partly reflects the size of the economy in its district, the banks under its watch and the stature of its economists.

The Dallas Fed, under Robert McTeer, for example, has built a reputation for research on Latin America. The St. Louis Fed, under William Poole, is known for a monetarist bent.

The New York Fed is by far the most powerful of the 12 given its president’s permanent seat on the Federal Open Market Committee. The San Francisco Fed oversees the largest district: Its region encompasses 35% of the U.S. landmass and is the home of a fifth of the American population.

In Richmond, Va., Broaddus has raised the profile of his bank by championing low inflation. From 1994 to ‘97, he voted five times to raise interest rates, even as most fellow policymakers voted to hold them steady.

Research by his top economist, Marvin Goodfriend, can sway Federal Open Market Committee members, says Lou Crandall, chief economist at Wrightson-ICAP, the U.S. research arm of broker/dealer ICAP.

Though the Fed’s mandate is to fight inflation and keep employment stable, Goodfriend has argued lately that controlling inflation should be the prime objective.