New Faces At The Federal Reserve

by: Robert W. Baird & Co.

By Craig Elder, Senior Vice President and Fixed Income Strategist, Robert W. Baird & Co., Inc.

Recent Changes at the Fed

Federal Reserve Governor Jeremy Stein recently resigned and will return to teaching at Harvard (it is our understanding that he needed to return to Harvard this fall to maintain tenure) and Cleveland Fed President Sandra Pianalto retired. She was succeeded (as of June 1) by Loretta Mester, the research director of the Philadelphia Fed since 2000. The Senate voted, in June, to confirm, (two separate votes) former Bank of Israel Governor Stanley Fischer to the Fed board, and as vice chairman. The Senate also approved the nominations of Lael Brainard, a former U.S. Treasury undersecretary for international affairs, and Jerome Powell, for a full 14-year term on the Board of Governors after filling an unexpired term two years ago.

With these nominees confirmed, the White House still has two more governor seats to fill. It is reported that President Obama is considering someone from the Community Banking area for one of the posts as Ms. Yellen has said she favors having a community banker join the board after two members with experience in the industry, Elizabeth Duke and Sarah Bloom Raskin, left over the past nine months. Below are some additional data on Mr. Fischer, Ms. Mester, Ms. Brainard and Mr. Powell.

Stanley Fischer - Federal Reserve Board of Governors & Vice Chair

Mr. Fischer, who holds both U.S. and Israeli citizenship, stepped down as governor of the Bank of Israel, midway through his second five-year term. He was credited with helping the $258 billion economy weather the global financial crisis better than most developed countries. Fischer was born in Zambia, then called Northern Rhodesia.

He earned his doctorate in economics in 1969 at the MIT, where he studied with future Nobel laureate economists Paul Samuelson and Robert Solow. He joined the faculty as an associate professor in 1973 and later taught future policy makers, including Ben Bernanke and European Central Bank chief Mario Draghi. He was chief economist at the World Bank from 1988 to 1990. After returning to teaching at MIT, he joined the IMF as the No. 2 official in 1994, helping to quell financial crises in Mexico, Russia and Asia. He left the IMF in 2001 and joined Citigroup Inc. as a vice chairman from 2002 to 2005.

Loretta J. Mester – President of the Cleveland Federal Reserve Bank

Loretta J. Mester took office on June 1, 2014, as the eleventh president and chief executive officer of the Fourth District Federal Reserve Bank, at Cleveland. In 2014, she serves as a voting member of the Federal Open Market Committee completing Ms. Pianalto’ s term.

Prior to being named president and chief executive officer of the Federal Reserve Bank of Cleveland, Ms. Mester had been executive vice president and director of research at the Federal Reserve Bank of Philadelphia, where she was the chief policy advisor and oversaw the economists and analysts in the Research Department, as well as professionals in the Financial Statistics Department and the Payments Cards Center. She joined the Federal Reserve Bank of Philadelphia in 1985, becoming senior vice president and director of research there in 2000. Her areas of research expertise include the organizational structure and productive efficiency of financial institutions, financial intermediation and regulation, agency problems in credit markets, credit card pricing, central bank governance, and inflation.

Ms. Mester graduated summa cum laude with a bachelor's degree in mathematics and economics from Barnard College of Columbia University. She earned her M.A. and Ph.D. in economics from Princeton University, where she was a National Science Foundation Fellow.

Lael Brainard – Federal Reserve Board of Governors

Ms. Brainard was the United States under Secretary of the Treasury for International Affairs. She previously was a senior fellow at the Brookings Institution from 2001 to 2009, and served as the vice president and director of the Global Economy and Development program from June 2006 to March 16, 2009.

She served as Associate Professor of Applied Economics at the MIT Sloan School of Management, where her publications made important contributions on the relationship between offshore production, trade, and jobs; the measurement of structural and cyclical unemployment in the U.S. economy; and strategic trade policy. Ms. Brainard has also worked at McKinsey & Company advising corporate clients on strategic challenges and on microenterprise in West Africa.

She graduated with highest honors from Wesleyan University with a degree from the College of Social Studies and received masters and doctoral degrees in economics from Harvard University, where she was a National Science Foundation Fellow.

Jerome H. Powell – Federal Reserve Board of Governors

Mr. Powell served as an assistant secretary and as undersecretary of the Treasury under President George H. W. Bush, with responsibility for policy on financial institutions, the Treasury debt market, and related areas. Prior to joining the Bush administration, he worked as a lawyer and investment banker in New York City. In 1985, Mr. Powell was an Associate at Dillon Read and at the time of his Senate confirmation in September 1990 he was a Senior Vice President of the firm.

Mr. Powell received an A.B. in politics from Princeton University in 1975 and earned a law degree from Georgetown University in 1979. While at Georgetown, he was editor-in-chief of the Georgetown Law Journal. Prior to his appointment to the Board of Governors, Powell was a visiting scholar at the Bipartisan Policy Center in Washington, D.C., where he focused on federal and state fiscal issues. From 1997 through 2005, he was a partner at the Carlyle Group.

He was nominated to the Federal Reserve Board of Governors by President Obama in combination with Jeremy C. Stein in order to help garner bipartisan support for both nominees. Stein's nomination had previously been filibustered. Mr. Powell was nominated for another term in January 2014, along with Stanley Fischer and Lael Brainard.

Composition of the FOMC Voters – “Doves” and “Hawks” at the Fed

Markets in particular will be watching for signs that characterize current and future members of the FOMC as a “dove” or a “hawk.” In monetary policy parlance, a “dove” generally tends to focus more on higher employment, while the “hawks” are more concerned with the central bank’s inflation targets. Some central bank officials take a centrist stance.

Mr. Fischer’s appointment to the Board of Governors also makes him part of the 12-member FOMC. As the Cleveland Fed has a vote on FOMC this year, the new president and CEO, Loretta Mester, will be voting on policy decisions right away. Any new appointments to the board will also impact the FOMC composition and therefore decisions on the Fed funds rate.

Below are two tables listing the FOMC voting members for 2014 and 2015 and their current stance on monetary policy. We use the term current because members have changed their views of the markets, inlfation and interest rates over time. For instance, Narayana Kockerlakota was once considered to be either “hawkish” or a “hawk” but changed to the point that he is now considered a dove.

As you can see from the tables, the FOMC voters this year tend to be less dovish than the voters in 2015. If we assign numerical values of 1-5 with hawks given the value of 1 and doves given the value of 5, the 2014 FOMC voters average 3.2, which makes the centrist. However, in 2015 with the addition of Charles Evans of Chaicago combined with Charles Plosser of Philadelphia and Richard Fisher of Dallas exiting the voting group, the voters move closer to the dovish area with a numerical value of 3.7. The implication from this is the Fed will be more reluctant to raise interest rates next year than some think. We believe that they will wait to raise the Fed Funds target rate until mid-to-late next year.

Please remember that this is our opinion of the voters and not necessarily the view that they have of themselves. Also, we assigned values to the two new voters for Ms. Mester and Ms.Brainard though they have yet to vote at a FOMC meeting. We feel that Ms. Brainard will possibly lean to the dovish side and Ms. Mester to the hawkish side based on Ms. Brainard’s coming from the Treasury and Ms. Mester coming from the Philadelphia Fed. However, since neither has voted in an FOMC meeting, no one knows for certain whether they will be hawkish or dovish.

Disclosures: For investment advice specific to your situation, or for additional information, please contact your Robert W. Baird Financial Advisor and/or your tax or legal advisor.

Copyright 2014 Robert W. Baird & Co. Incorporated.

Other Disclosures

UK disclosure requirements for the purpose of distributing this research into the UK and other countries for which Robert W. Baird Limited holds an ISD passport.

This report is for distribution into the United Kingdom only to persons who fall within Article 19 or Article 49(2) of the Financial Services and Markets Act 2000 (financial promotion) order 2001 being persons who are investment professionals and may not be distributed to private clients. Issued in the United Kingdom by Robert W. Baird Limited, which has offices at Mint House 77 Mansell Street, London, E1 8AF, and is a company authorized and regulated by the Financial Conduct Authority. For the purposes of the Financial Conduct Authority requirements, this investment research report is classified as objective.

Robert W. Baird Limited ("RWBL") is exempt from the requirement to hold an Australian financial services license. RWBL is regulated by the Financial Conduct Authority ("FCA") under UK laws and those laws may differ from Australian laws. This document has been prepared in accordance with FCA requirements and not Australian laws.