UPDATE 2-Philadelphia Fed economist tapped to run Cleveland Fed
* Mester, top adviser to Plosser, to succeed Pianalto June 1
* Could return Cleveland Fed to more hawkish roots
* Appointment comes as U.S. central bank winds down stimulus
Feb 13 (Reuters) - The Federal Reserve Bank of Cleveland on Thursday named Loretta Mester, a veteran of the U.S. central bank and the top policy adviser at its hawkish Philadelphia branch, as its new president, succeeding Sandra Pianalto.
Mester, the Philadelphia Fed's respected director of research, will take the reins in Cleveland on June 1. The 55-year-old will immediately have a vote on U.S. monetary policy, beginning at a meeting later that month, as the central bank is still expected to be in the midst of unwinding its accommodation.
Mester is a 28-year veteran of the Fed and now advises Charles Plosser, the head of the Philadelphia Fed. She could join Plosser and the handful of other hawkish policymakers who are critical of the aggressive stimulus the central bank has unleashed in the wake of the recession.
She will join the upper ranks of a Fed that has just begun a difficult reversal of the most accommodative monetary policy experiment ever, including the winding down of trillions of dollars of asset purchases and years of rock-bottom interest rates. On Feb. 1, Janet Yellen became the Fed's first female chair in its 100-year history.
Mester, a Princeton University alumna who joined the Philadelphia Fed in 1985 as an economist, has written or co-written dozens of research articles on banking but relatively little on monetary policy, according to a database of economics papers housed at the St. Louis Fed.
However, a year ago, she warned in a presentation that loose policy and high budget deficits could stoke inflation over the medium term - a concern long held by policy hawks and many Republican lawmakers, though inflation has in the last couple year years remained soft.
"I strongly believe she will be more hawkish than the median voter but I don't think she will be as extreme a hawk as Fisher, Lacker or Plosser," said Michael Feroli, an economist at JPMorgan in New York.
Like Plosser, Dallas Fed President Richard Fisher and Jeffrey Lacker of the Richmond Fed have criticized the latest bond buying program, which is running at $65-billion per month after having been trimmed in each of the last two months.
The central bank aims to shelve the purchases by later this year, though it intends to keep rates near zero for a while longer than that, a message that Yellen reinforced in congressional testimony on Tuesday. The Fed has kept rates that low since the depths of the financial crisis in late 2008.
The appointment of Mester further clarifies things at the Fed, where former Bank of Israel Governor Stanley Fischer has been nominated as vice chair, and Lael Brainard, a former top Treasury official, has been tapped as a governor.
Through representatives, Mester and Pianalto declined to comment.
A RETURN TO HAWKISH ROOTS?
Pianalto, 59, announced she would retire in August after a 10-year stint in which she mostly avoided media interviews and never dissented against policy decisions made in Washington.
While Pianalto has quietly and reliably supported former Fed Chairman Ben Bernanke's aggressive steps to boost the U.S. economy, interviews in recent months with several current and former employees of the Cleveland Fed showed a desire to tap a more independently minded president.
Jerry Jordan and Lee Hoskins still loom large as past Cleveland Fed presidents who were willing to take on authoritarian Fed Chairman Alan Greenspan in decades past.
"Historically, the way to get noticed was to be hawkish," said Diane Swonk, Chicago-based economist for Mesirow Financial. "Clearly, the Cleveland Fed's goal is to return to its roots."
The Cleveland Fed supervises one of 12 U.S. central bank districts, including the manufacturing-heavy states of Ohio and parts of Pennsylvania, Kentucky and West Virginia. At 950 employees, the Fed bank is relatively small, but its president gets a vote on policy every other year, which is more frequent than most other districts.
In a statement, Mester said the Cleveland Fed has "great strengths including its outstanding research on inflation measurement and forecasting, its contributions to financial stability analysis, and its innovative work in U.S. Treasury revenue collections."
Directors at the Cleveland Fed formed a committee and hired New York-based executive search firm Spencer Stuart in October.
It conducted interviews with a few outside candidates, including at least one banker, in recent months, according to three people with knowledge of the meetings.
But on Thursday the Cleveland Fed said its board was unanimous in choosing Mester despite "many outstanding candidates who were part of (the) search process."
The Fed's Board of Governors would have had to sign off on the appointment, under Fed convention.
Mester is well known at the Fed Board in Washington. She regularly attends meetings of the policy-setting Federal Open Market Committee alongside Plosser, who earlier this month called on the central bank to cut its bond-buying program faster than planned and halt the program by mid-year.
Plosser, who also votes on policy this year under the Fed's rotating system, has signaled he could dissent if the asset purchases are reduced too slowly, Swonk said. "If Mester doesn't join him (in a dissent) she will at least support him."
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