Mar 30, 2023
San Francisco Fed’s Daly Stays Mum While Criticism Mounts Over SVB Oversight
(Bloomberg) -- One of the Federal Reserve’s most prolific policy messengers is laying low at a crucial moment for the central bank, after finding herself at the center of controversy over turmoil in the banking sector.
San Francisco Fed President Mary Daly, who has been an increasingly influential voice on Fed policy in recent years, is now a target of criticism over how effective Fed supervisors were in monitoring and responding to problems at Silicon Valley Bank before it collapsed.
Just a few weeks ago, Daly’s name was among a handful floated as potential candidates to replace former Vice Chair Lael Brainard on the Fed board in Washington. She is a close ally of Chair Jerome Powell, regularly amplifying his views in TV interviews and speeches.
In the wake of SVB’s failure, Daly, 60, is staying out of public view.
She canceled an upcoming appearance at her own bank’s economics conference, where she was set to introduce a Fed governor on March 31. A spokesperson said Friday the change was due to a scheduling conflict. She has no events or speeches scheduled for the next few weeks, the spokesperson confirmed.
Fed officials have a customary 13-day quiet period that lifts the Friday after each policy meeting. Coincidentally, the latest period began just after SVB collapsed and lifted March 24, so few officials have weighed in on the turbulence in financial markets.
Nevertheless, Daly’s absence is conspicuous: She is often among the first officials to speak publicly following Fed policy decisions. In the year since the central bank began raising interest rates, Daly has always spoken during the week after a Fed meeting — sometimes more than once.
Her ability to communicate clearly, and with an empathetic tone uncommon among traditionally staid central bankers, has made her one of Powell’s most reliable deputies. Her efforts to reach a broad audience — from an Instagram Live event with students in the early months of the pandemic, to appearances on the conservative Fox News channel — have elevated her national profile.
“She’s really been, in particular, very effective at creating the coalition of support, not just among progressives — which you might think is her natural constituency — but also Republicans,” said Derek Tang, an economist and Fed watcher at LH Meyer/Monetary Policy Analytics in Washington. “This is sort of a blemish on her record. Whether or not it could be fatal remains to be seen.”
The Fed is facing multiple probes into its supervision of SVB. The problems at the bank, which relied heavily on uninsured deposits and holdings in Treasuries that have declined in value in the past year, were raised by on-the-ground examiners from the Fed’s San Francisco branch months ago. What is still unclear is why SVB was not made to address the problems, and whether either Daly or Powell knew about the escalating issues.
“In the most immediate sense, this is clearly a supervisory failure,” Dan Tarullo, a former Fed governor who oversaw financial regulation and supervision at the board, said in a March 23 interview with Bloomberg Television’s David Westin.
Supervision of mid-size banks like SVB, with more than $100 billion in assets, is guided by staff and officials at the Fed board who set policies and regulations, and implemented on the ground by examiners at the regional Fed banks.
At the San Francisco Fed, the culture under Daly at times put more emphasis on improving relationships among staff than installing people with strong oversight backgrounds, leading to heightened turnover among supervisors, according to people close to the situation.
The Fed’s Vice Chair for Supervision Michael Barr told lawmakers Tuesday that SVB’s failure was first and foremost a “textbook case of mismanagement.” Barr is leading the Fed’s internal review, the results of which are due by May 1.
Meanwhile, Republicans on the Senate Banking Committee have sought records from Daly and Powell on SVB’s failure. The House Financial Services Committee issued a bipartisan request for a Government Accountability Office investigation, and the Fed’s own internal watchdog has launched a review.
Senator Elizabeth Warren, a Democrat from Massachusetts, blasted top Fed officials for “an astonishing list of failures” in a March 15 letter to Powell. Asked on CBS’ “Face the Nation” on March 19 whether she has confidence in Daly, Warren said, “No, I do not.”
The focus on Daly threatens to tarnish an otherwise distinguished career at the San Francisco Fed.
She started at the bank in 1996 as a labor economist who delved into topics such as economic inequality and racial wage gaps, and rose to the prominent position of research division director.
Her work proved prescient: Daly helped inform Janet Yellen’s labor-market outlook when Yellen was head of the San Francisco Fed before the financial crisis. Following that recession, Daly’s research led to an important discovery about rigidities in employers’ willingness to adjust wages during downturns, and the subsequent impact on inflation.
Once one of the Federal Open Market Committee’s most dovish members, Daly quickly joined her Fed colleagues in advocating rapid interest-rate increases to combat inflation that last year reached a 40-year high.
Policymakers have been unified in their rate approach, with just two dissents over nine meetings since hikes began in March 2022.
Daly’s research into inequality and the San Francisco Fed’s work on climate change has at times drawn the ire of Republican lawmakers, who accuse them to straying into issues beyond the central bank’s scope.
Senator Tim Scott, the top Republican on the Senate Banking Committee, called out Daly in particular on Tuesday, and wondered whether SVB’s climate-related investments caused examiners in San Francisco to be more permissive of its risks.
Daly has echoed Powell’s remarks that the Fed is not a climate policymaker.
“Our work always comes back down to the core responsibilities that Congress gave us: stable, sound financial system, stable, dependable payment system and the dual mandate goals of price stability and full employment,” she said in a Feb. 3 interview with the Fox Business network.
The recent banking sector problems have also raised the perennial argument that the Fed’s 12 reserve banks, which are quasi private entities, should be subject to greater oversight, such as public-records requests under the Freedom of Information Act.
The banks jointly issued a statement Friday March 24 saying they will agree to a common policy over public requests for information.
Speaking in a television interview Sunday, Daly’s colleague Neel Kashkari, head of the Minneapolis Fed, called Daly an outstanding public servant.
“Nonetheless, we have to look at the findings that Vice Chair Barr comes out with, take those findings very seriously, and potentially make changes based on those findings,” he said.
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