Which will be more difficult for the Fed? Taming inflation or office renovation costs?

Budget documents released late last year show that the cost of the overall project has been inflated due to “significant increases” in the cost of steel, cement, lumber and other materials that “far exceed standard cost escalations.”

Most of the overruns are for gutting and renovating two buildings: the Fed’s headquarters, completed in 1937 and named for then-Fed Chairman Marriner S. Eccles, and an adjacent building tentatively known as “FRB-East.” The Fed bought that building, which opened in 1933, from the Department of the Interior five years ago. Renovations on both began last year and are expected to last until 2027.

Until then, the Fed’s chief executive has left camp for a third building that faces the headquarters from the north: the William McChesney Martin Jr. Building. It originally opened in 1974 and reopened in late 2021 after extensive renovations, including bathroom door sensors for contactless opening and a pair of Italian honey bee hives on the roof.

Fed officials say their goal is to move the majority of the board’s staff to offices closer together and to reduce central bank-rented space in central Washington.

The end result will benefit most of the 3,000 economists, lawyers and professionals who support the central bank’s seven-member board of governors, who set interest rates to manage economic growth and oversee the country’s financial system .

The massive construction project has largely flown under the radar, unusual in a city where regulators sometimes face fierce congressional protest over such facelifts. For the past decade, Republican lawmakers have pilloried the $145 million renovation of Brutalist-style offices that house the Consumer Financial Protection Bureau near the White House.

In the 1990s, two Democratic senators, dissatisfied with the Fed’s campaign to stave off inflation with hefty rate hikes, caused a budget stink, including building a towering new headquarters for the regional Fed bank — there are there are 12 spread around the world. country – in Dallas.

The Fed has been here before. Amid rising inflation in 1969, it delayed plans to build what would eventually become the Martin Building, then at an estimated cost of more than $30 million, and asked other regional Fed banks around the country to consider doing their part to fight high prices by postponing planned investments. construction activity. “This was done to minimize competition for scarce goods and services during the current inflation period,” the Fed said at the time.

The New York Fed’s plans to build a new building in Lower Manhattan in the 1920s ran to more than $25 million, well above its initial estimate of $10 million. A banking supervisor at the time complained in the New York Times that the “luxurious and lavish furnishings of marble and copper” “would make Solomon’s ancient temple seem rather cheap by comparison”.

This time, costs have also increased due to design changes demanded by local planning officials. While the Fed can move trillions with the click of a mouse, erecting a building in the District of Columbia is another matter.

“We have built-up land and it’s hard to get zoning,” said Fed Chairman Jerome Powell last November. While addressing a source of higher construction costs, he might as well have been talking about the project in his own backyard.

The National Capital Planning Commission and the U.S. Commission of Fine Arts, age-old government agencies that review federal property building proposals in the region, only approved the Fed’s renovations after the central bank downplayed certain design bloomers, most notably for the FRB-East building. .

For example, in 2020, members of the fine arts committee criticized the proposed addition of a five-story “bright glowing glass box” on FRB-East, saying it would look ugly at night and clash with an older, more modest Depression-era building. The Fed agreed to reduce the height and add a pattern of semi-opaque glass panels to make the addition more compatible with the original building. To make up for some of the lost space, the new plans have more square footage below ground level, which the Fed said increased the price tag.

Built in a “stripped-down Classicist” style with white Georgian marble, the Eccles Building was designed by French-born Philadelphia architect Paul Philippe Cret after legislation backed by President Franklin D. Roosevelt had the central bank out of the Treasury Department. moved. The boardroom, with 80-foot ceilings, briefly housed American and British military advisers during World War II, as it was one of the largest air-conditioned rooms in the city.

Over time, the building had decayed, say current and former staffers and policymakers. They described leaking ceilings, outdated electrical systems, and inefficient heating and cooling systems.

The recently completed renovations to the Martin building were plagued by delays. In 2015, the Fed fired the initial architecture and engineering firm hired for the job over what an internal watchdog described as shoddy work. Costs rose again when workers had to remove more asbestos than expected.

For years, those renovations were led by Mr. Powell, who served as governor before becoming chairman in 2018. His signature is on a visible piece of a steel beam in a top-floor cafeteria with a panoramic view of the DC skyline. In the 1990s, Fed Chairman Alan Greenspan hosted lawmakers, Supreme Court justices, and reporters for a Fourth of July fireworks celebration from an adjacent patio.

The new building boasts luxurious amenities: the boardroom where the Fed’s rate-setting committee meets has a dedicated faucet with still, sparkling, or chilled water, and the basement features artwork from the Fed’s private collection, including by Andy Warhol and Alexander Calder.

But the open-office design drew grumbling from some Fed staffers, including those who work with confidential bank records or other classified information.

Unlike other federal agencies, the Fed is not subject to annual funding from Congress and instead pays for its operations through the interest it earns from managing the nation’s money supply, so the renovations required no outside funding. approval from legislators is required.

However, the Fed is expected to lose money this year for the first time in its 110-year history, as it pays more money in interest to banks and other financial institutions on cash held at the central bank than it does when it raises interest rates. will earn $8.3 trillion in securities and other assets it owns.

The Fed raised interest rates last year at its fastest rate since the early 1980s to combat inflation, which also hit 40-year highs. The appearance of a 10-foot construction barrier around the Eccles Building last year fueled speculation among some market observers – erroneously – that it was a new security measure deployed to fortify central bank headquarters against public protest.

The Fed added a brief explanation of the construction project to a longer list of “frequently asked questions” on its website last fall to avoid such confusion.

The Fed is open for business, it says, “and Federal Reserve operations are not affected.”

Write to Andrew Ackerman at andrew.ackerman@wsj.com and Nick Timiraos at Nick.Timiraos@wsj.com

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