How Will the Next Chairman Approach Fed Policy?

Federal Reserve

Ben Bernanke’s second term as Chairman of the Federal Reserve will end in January, and word on the street is that he will not seek (or be offered, depending how you look at it) a third term. This means that for the first time since 2006, the position — one of the most powerful policy posts in the world — is up for grabs.

As it stands, the job is a toss up between two candidates: current Fed vice chair Janet Yellen and former Treasury Secretary Lawrence Summers. Sometime between now and January, President Barack Obama will nominate one of them, and that candidate will have to be confirmed by the Senate. (If the president fails to nominate or the Senate fails to confirm someone, then Yellen, as current vice chair, will automatically assume the office.)

Speculation as to who will get the presidential nod has been rampant. Yellen is something of a crowd favorite, while Summers is rumored to have the ‘inside track’ thanks to his work for the Obama Administration. For his part, when asked about the nomination, the president has made it clear that while both economists — as well others, perhaps including former Fed Vice Chair Donald Kohn — are on the short list, they are all receiving fair and objective consideration.

To be clear, the chairman of the Fed isn’t a dictator. Whoever gets the job will not be able to bend U.S. monetary policy to his or her will — although influential, the chairman is more a manager of consensus than a maverick. This perception is one reason why many prefer Yellen over Summers. As an economist, he is perhaps most well known for serving as the Treasury Secretary under President Bill Clinton from July 1999 to January 2001. He also served as Director of President Obama’s Economic Council in 2009-10 where he quickly earned the respect of the president.

However, those who have worked with him often report that he can be difficult to work with and rhetorically combative. But no matter how brilliant he may be — something that even critics concede ground on — Summers is haunted by his involvement in the Gramm-Leach-Bliley act, which many argue was a major catalyst for the financial crisis. Broadly speaking, the Gramm-Leach-Bliley Act repealed the Glass-Steagall Act provisions that separated commercial and investment banks. Once this division was removed, commercial banks were able to participate in the financial voodoo of mortgage-backed securities and collateralized debt obligations.

Commenting on the issue in 2009, Arianna Huffington described Summers as “one of the top economic minds of his generation,” but added that “his core beliefs and assumptions helped lay the groundwork for the current crisis.” Although Summers is not for an unregulated financial sector, he does not seem to champion the same type of regulatory framework that many see as essential for the modern financial system.

As vice chair since 2010, Yellen has played an instrumental role in the evolution of the Fed’s role as a financial regulator. She has helped create a framework for financial regulation — much of which is tied up in advancing the Fed’s capacity to gather information, as with the establishment of the Office of Financial Stability Policy and Research — and has helped oversee the implementation of the Dodd-Frank Act.

Considered by some to be even more dovish than Bernanke, if nominated, Yellen is not expected kick up too much dust — something that many find attractive. However, critics fear that she is too willing to trade higher inflation for lower unemployment, which is a somewhat dubious proposal given the nebulous connection between monetary policy and long-term employment. Many feel that accomodative monetary policy has played its part and can do little more to solve the longer-term problems facing the economy.

A third candidate who was kicked around but seems to have fallen through the cracks is, as mentioned, former Fed vice chair Donald Kohn. He took office just before the financial crisis and was instrumental in the development of post-crisis policy. However, he seems to be outgunned by Yellen’s reputation and Summers’s personality.

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