In the race to the top of the Fed, who will take the prize: Summers, Yellen… or a surprise?
21/08/2013 | FxM – Evan Brock Gray
Lawrence (Larry) Summers, Janet Yellen, Timothy Geithner, Roger Ferguson and Donald Kohn are the top candidates for the job of the next president of the U.S. Federal Reserve Bank after Ben Bernanke steps down in January, 2014, following two reasonably successful terms as “Head of the Fed”.
Who is given job – officially called “Chairman” – is extremely important not only in the U.S. economy and for the current and future governments, but also in the eyes of the world´s financial markets, other governments and central banks. The President of the U.S. has the power to appoint a candidate but the U.S. Senate has to confirm them, making it seem at first glance, with the presidency and Senate enjoying a democratic majority, that this time around there won´t be much fighting over who gets to be arguably one of the top five most powerful people in the entire country. Or will there…?
President Barak Obama has a tough choice facing him. There are many qualified candidates, some more than others, but the list above shows the main two candidates at the moment; ivy-leaguers Larry Summers (Harvard) and Janet Yellen (Yale and Brown). Even though the Chairman/woman sits on a committee of 18 other people, their position has enormous amounts of sway at the different branches (smaller banks of the Fed around the country and with Washington, in general.
Monetary policy (money supply and interest rate control) has become the weapon of choice in the U.S. follow Washington´s jump off the fiscal cliff earlier this year and it is up to the Fed, namely the Chairperson, to use their policy instruments to help the economy and employment. What´s more, the Dodd-Frank law of 2010 gives more power and oversight over the country´s financial system to the Federal Reserve which means that the entire financial industry (and their lobbies) will be on the edge of their seats until it´s all decided.
So let´s look carefully at these two candidates – their background and their professional ideals and tendencies – to try to make an educated guess (in August) about who would be the better candidate and who will be selected. Janet Yellen is an economist: cool-headed, calculating, lightly political and not afraid to answer a question with “that depends…”. She is classically trained, both academically (Brown University and Yale University) and professionally (former Harvard University professor and Professor Emeritus at UC Berkeley where, by the way, she was given the Haas Business School´s outstanding teacher award). Universities aside, Yellen has been working for the Fed since 2004 as the president of the San Francisco Fed branch until 2010 when she became (the current) Vice Chairwoman of the Fed. She was a part of the all-important Federal Open Market Committee (FOMC),which is in charge of the key decisions on, well, the open market operations: setting U.S. interest rates, controlling the growth of the money supply and buying/selling of U.S. Treasuries (securities). That means as a former, well-received member she wouldn´t cause as many fractions inside the FOMC as an outsider would. It is said she is a “dove” which means it´s viewed that she believes managing employment levels through loose monetary policy is more important than keeping inflation levels in check. Probably based on her experiences with Bernanke and being a professor, it is said that she has a way of explaining complex arguments clearly and simply which could be a particularly useful trait since a Chairperson´s language use in their speeches can be either medicine or poison for markets. Her support in the Senate is ample and growing, especially among the female Senators and democrats.
Larry Summers is an intellectual: fast thinking, able to bring together abstract ideas in a coherent way, skeptical of everything he applies himself to and is famous for arrogant sounding line: “You tell me why I´m wrong”. He is also known for interrupting people to finish their thoughts and then make his own conclusions. But that self-assuredness hasn´t hindered him from making a name for himself and being successful. At age 16 he enrolled in the Massachusetts Institute of Technology (MIT). He has been the president of Harvard University where beforehand he was one of the youngest tenured professors in the school´s history. He was picked up by the Clinton administration, was named Secretary of the Treasury from 1999 to 2001 and was brought in the White House again by the Obama administration as the current director of the National Economic Council, a type of governmental think tank run from inside the White House. He is said to be a “hawk” which means he´s more concerned about controlling inflation with a more restrictive monetary policy than about unemployment. His support in the Senate is like an ocean tide – always coming and going from all angles (he mainly has democratic support but his conservatism is respected by Republicans).
The main issue on the Fed´s table is when (or if) to start “tapering”, or slowing, its practice of quantitative easing: the $85 billion per month bond (and other financial assets) buying program to stimulate the economy, keep interest rates low and boost the job market. If the economic recovery continues in the U.S. and unemployment rates drop to about 6.5%, the Fed may decide to decrease the amount of money it is printing to fund this program. Markets will not like this, but have been running hot for all of 2013 (they are above pre-crisis 2007 levels and are due for a correction). How the next Fed Chairperson reacts with their monetary policy tools after a volatile end to 2013 is something President Obama is clearly pondering since he will have to rely on this person for the remainder of his term of about three years.
So the choice is up in the air for one of the few people in the world that when they speak, everyone listens, and keenly. Will it be super-smart but emotionally unstable Larry? Will it be well-trained but light-hearted Janet? Or will Timothy, Roger or Donald come out of the shadows and leave all heads spinning? Everyone wants to know the end of the story but, alas, it looks like we´ll just have to go back to enjoying what we have left of our summer holidays and just let the chips fall where they may. Don´t worry, we will all be able to either praise or complain about the choice of the next Fed president at the same time as we start complaining about the cold weather.