Waller’s push to shake up Fed stirs fears over regional autonomy

A proposal to streamline Federal Reserve operations has raised alarm inside the sprawling institution over whether it would undermine the autonomy of its 12 regional banks, just as the central bank braces for broader changes from its new chairman, Kevin Warsh.

The initiative – led by Warsh’s one-time rival for the top job, Governor Christopher Waller – aims to centralize certain back-office functions, such as human resources and information technology, at individual reserve banks rather than duplicate them across the Fed’s regional outposts. The goal, Waller said in speeches this spring, is to better serve taxpayers and keep up with changing technology.

Across the Fed system, officials and staffers worry Waller’s urgent push to centralize operations will lead to a trickle of power and decision-making away from the regional banks toward Washington, ultimately opening up the Fed to more political pressure, according to people familiar with the matter.

Some inside the Fed also described Waller’s effort as moving too quickly, too forcefully and without consensus. That led to infighting among some of the 12 reserve bank presidents over how the operations may be divided, and to tension between them and Waller, the people said, speaking on the condition of anonymity. While there is consensus over the need for more efficiency, the regional leaders want to ensure their authority and autonomy are preserved, they said.

It’s unclear when, or whether, any of the proposed changes will be implemented. Waller has also said that the decisions over what functions are consolidated, and where, will rest with the regional presidents.

Still the angst, which has been building since late last year, is more recently amplified by the arrival of Warsh, who vowed to run a “reform-oriented” Fed at his White House swearing-in ceremony last month. It also comes amid President Donald Trump’s persistent campaign to exert more influence over the central bank. A Fed spokesperson declined to comment.

Preserving the reserve banks’ ability to make decisions about these changes will be key to garnering more support among the banks’ leaders, said Loretta Mester, a former Cleveland Fed president.

“The reserve banks have to assert their authority,” Mester said. “If they just agree to everything then it could very well be that the governance structure does change in a way that does undermine the reserve bank structure, and that would not be good for the American public.”

Regional independence

Congress created the Fed in 1913 and set up the reserve bank system to ensure geographic representation at the central bank. The regional offices – in 12 cities including St. Louis, San Francisco and Dallas – carry out major functions, from circulating currency and processing checks, to executing interbank transfers and implementing monetary policy.

Unlike members of the Fed’s Board of Governors in Washington, the regional leaders aren’t appointed by the president or Senate-confirmed. Instead, they’re selected by their banks’ boards of directors, with input from the Fed’s governors, and enjoy a fair amount of operational autonomy.

That independence contributes to the Fed’s ability to set interest rates without consideration to politics, something that research has shown leads to better economic outcomes. The institutions also require sufficient staffs to operate effectively in their districts and, in turn, bring ideas and issues to Washington via their presidents, Mester said.

Waller has said that reserve-bank work critical to interest-rate policy should remain local: Bank presidents should continue to be informed by their own staff of economists and should conduct outreach to the businesses and people in their districts.

“These activities are enormously valuable to carrying out the Fed’s mission, and they should continue,” Waller said in a speech in April, unveiling his plans.

Potential downsizing

Waller’s vision would likely result in a downsizing of the roughly 20,000-strong workforce across the reserve banks, and for their presidents to relinquish some decision-making power to other banks.

“Autonomy is a virtue – but not when it produces costly duplication that serves no one,” he said. “We owe this to the American people we serve.”

The plans, however, have raised broader questions about the regional banks’ future role in the Fed system, especially if they’re left with fewer responsibilities and workers.

Waller acknowledged the concerns in a subsequent speech on May 8, pushing back on the idea that his proposals were “somehow at odds” with preserving regional perspectives and the independence of the reserve banks.

But he said none of his plans – which he described as a “framework” developed by the presidents – would require a vote of approval from the Board of Governors or the 12 reserve bank presidents.

That fueled worries among the rank and file. Instead of learning about a sweeping overhaul from their regional bosses, it came in a formal speech from a Trump-appointed governor based in Washington, just before a new Fed chief was set to take over.

Three days later, the regional presidents sent a rare, joint email to their collective staffs seeking to lower the temperature, according to people familiar with the matter, and acknowledging that “change can feel uncertain.”

They pledged to “adapt to a fast-changing world,” according to a copy of the memo seen by Bloomberg News, matching Waller’s rhetoric. But they also said pointedly: “We think it is important that you hear from us.”

The memo emphasized the importance of “investing in the talented people who make our mission possible,” and said the modernization “will strengthen our regional roots.”

Minneapolis Fed President Neel Kashkari, who serves as chair of the central bank’s Conference of Presidents, said in a statement that work on the project involving regional bank heads and Waller was ongoing.

“The reserve bank presidents are working with Governor Waller and our boards of directors to design a framework to modernize Federal Reserve operations to deliver excellence and efficiency while reinforcing the regional structure Congress designed,” he said.

In their email to staff, the presidents also said they wanted to hear what Warsh, who was sworn in May 22, has in mind. Jerome Powell, at his last press conference as Fed chair on April 29, offered support for the ideas, but said, “It’s a question of how do you accomplish it.”

“There’s a back-and-forth going on, on that,” he said. “But everybody, everybody’s on the same page.”

Waller, Powell added, “is particularly passionate” about the Fed being a good steward of the public’s money.

‘Independent spirit’

After taking over the Fed committee that oversees reserve bank affairs in 2022, Waller began mulling ways to make their operations more efficient, ramping up those efforts in early 2025, according to people familiar with the matter.

Several of the 12 reserve bank presidents have spoken about the importance of regionalism in the Fed system, coinciding with Waller’s effort and broader concerns about Fed independence.

“The non-political appointees that are there from all over the country at the reserve banks, they bring an independent spirit to the job,” Chicago Fed President Austan Goolsbee said in an interview with the Financial Times in October.

Waller’s renewed push comes at a time when many staffers were already anxious about the Trump administration’s drive for institutional changes at the central bank and complaints about its spending.

Between 2014 and 2024, the latest figures available, employment at the reserve banks rose 11% and operating budgets climbed 16%. Those increases are smaller than those for the Fed board, but the 12 regional branches have a combined workforce that’s roughly seven times larger.

“The Fed’s bureaucracy is bloated,” said Aaron Klein, a senior fellow in economic studies at the Brookings Institution. “The Fed’s best defense against Trump would have been to keep its fiscal house in order.”

Centralizing functions like procurement could lead to greater cost savings, said Ellen Meade, an economics professor at Duke University who advised Fed officials during a decades-long career at the board. Still, she said, “I do think it’s a pretty sweeping change all at once.”