By Jonathan Spicer and Ann Saphir
NEW YORK/SAN FRANCISCO (Reuters) - John Williams, the genial president of the Federal Reserve Bank of San Francisco and a top monetary economist, was promoted on Tuesday to head the New York Fed in a politically explosive decision that has been criticized for ignoring more diverse candidates.
The New York Fed's directors said Williams will on June 18 succeed William Dudley in what is seen as the second-most influential position at the U.S. central bank. In selecting a white man and long-time Fed insider, they said he was the best of an "exhaustive and inclusive" search of diverse candidates and highlighted Williams' commitment to public service.
Fed Chairman Jerome Powell had a bigger hand than predecessors in stressing the need to select someone with monetary expertise, according to people familiar with his role in the process. That suggests Williams, 55, could in effect become the face of the current policy of "gradual" U.S. interest-rate hikes, even as the New York Fed president's traditional role as financial markets expert could diminish.
In a statement, Powell welcomed Williams to the role and said he "valued his insight and wise counsel during my years at the Federal Reserve, and look forward to continuing to work with him in the years ahead."
The New York chief is traditionally among the Fed's three core policymakers and unlike other district presidents has a permanent vote on rates. The job also oversees market operations including the management of some $4.4 trillion in assets, and supervises the largest U.S. banks - two weak spots on Williams' resume relative to some other candidates Reuters reported to be considered as the list narrowed in recent months.
The Fed's Board of Governors in Washington approved the decision in New York. Powell and the other two Fed governors had a say on the ideal nominee before he was chosen, according to the co-chairs of the New York Fed's search committee.
Because this is the only top Fed job where the candidate is not selected by U.S. President Donald Trump and confirmed by the Senate, Democratic lawmakers and community activists saw it as an opportunity to lobby for someone who breaks from a long tradition of white men with ties to Wall Street.
The outcry against the selection process reached an extraordinary pitch last week after the Wall Street Journal cited unnamed sources and reported Williams as the front runner. In response, at least two U.S. senators urged more congressional oversight of the process and argued women and people of color should not be overlooked so that the Fed better reflects the public.
While the ranks of minorities and women are growing across the Fed, all but two of its 15 current policymakers are white and all but three are men. The 104-year-old central bank had never had a black district president until last year.
"I am disappointed by the search committee's selection of another Fed insider," Senator Sherrod Brown, ranking Democrat on the committee that oversees the Fed, said on Tuesday.
The New York Fed directors heading the search, Board Chair Sara Horowitz and Glenn Hutchins, published a timeline saying that roughly half of the qualified candidates at each stage in the search process were "diverse," including two of the final three. They did not name candidates.
Williams "best fulfilled the criteria we'd identified as well as the feedback we'd received through our public outreach efforts," said Horowitz, founder of the Freelancers Union.
Dudley, a key architect of the Fed's crisis era response, will step down on June 17.
He and Williams were reliable advocates for years of near-zero rates to drive down unemployment. In 2016 Williams was among the first of the so-called doves to back more frequent hikes, in part due to worries over inflation that has not yet materialized. (For a graphic of the Fed's doves and hawks, see: http://tmsnrt.rs/2d4Mta4; for a graphic of the legacy of the Fed's stimulus, see: http://fingfx.thomsonreuters.com/gfx/rngs/USA-FED/010050VD1YM/index.html)
After succeeding former Fed Chair Janet Yellen as San Francisco Fed president in 2011, Williams has continued to publish his influential research suggesting the neutral rate of interest has dropped sharply thanks to an aging population, dragging down overall economic growth.
Williams has repeated he does not actively monitor financial markets at his office desk because he wants to focus on longer-term trends, not the ups and downs of asset prices - an omission that has raised questions for some bankers that interact daily with the New York Fed.
Democratic Senator Elizabeth Warren meanwhile questioned his "fitness" to oversee Wall Street given that the 2016 Wells Fargo fake-accounts scandal happened on his watch in San Francisco.
But Powell, a trained lawyer and former banker who succeeded Yellen in February, has quietly stressed continuity and economic expertise amid a ongoing leadership transition.
Reuters reported March 1 that Powell had in January favored Williams for Fed vice chair - but Williams' bid for that job fell through and the White House ultimately decided on Richard Clarida, an economist at Pimco, who is yet to be formally named.
The search committee co-chairs said they had regular consultations with the Fed Board to make sure they were considering the right sort of candidate. One source familiar with the New York Fed's search process said Powell made it clear he trusts Williams. The Fed Board declined to comment on Powell's role.
In an interview on Tuesday, Yellen, who stepped down as Fed chair in February, called Williams an "adept, practical and thoughtful policymaker" who "made important contributions that have been immensely influential in the conduct of monetary policy."
Yet the drum beat of criticism in recent weeks, including a demonstration outside the New York Fed and letters from state and city lawmakers, is raising worries within the Fed about independence from political pressure. Some lawmakers have in the past said the New York Fed president should be a presidential appointment like Fed governors.
"Just as public companies are subject to greater shareholder activism and need to be proactive and vigilant about corporate governance, the Fed needs to take its shareholders seriously, recognize they have been failing in their stated desire for diversity and address the obvious shortcomings in their search process," said Julia Coronado, founder of MacroPolicy Perspectives and a former Fed economist.
The New York Fed's directors said diversity was a focus from the beginning and even hired a second executive search firm specializing in it. Reuters previously named six candidates who were interviewed for the job, most of them with Wall Street ties, including two women and two black men.
Williams' departure leaves another vacancy at the central bank, for which the San Francisco Fed's head of research, Mary Daly, is seen as an early contender.
(Reporting by Jonathan Spicer and Ann Saphir; Editing by Andrea Ricci)