Head to head: Who’ll run the Fed?

An unusual battle has broken out to decide who replaces Ben Bernanke

Until this month, President Barack Obama probably thought he could choose the next head of the US Federal Reserve in relative peace, without enduring the kind of noisy debate that ensues when top political jobs – at the Department of State or Defence, say – fall vacant.

That, after all, is the way it has been for decades. The administration consults interested parties in the worlds of politics and economic policy, quietly zeroes in on a candidate and then names its man – because thus far it has always been a man – at a carefully choreographed press conference, usually from the East Room of the White House.

Not this time. Although Ben Bernanke, hasn’t yet announced his intention to step down, the man who led the central bank through the financial crisis and the Great Recession is widely expected to leave when his second four-year term ends at the beginning of next year.

The consensus on Wall Street, and among professional economists according to recent polls, had been that his deputy, Janet Yellen, would be named as the next head of the Fed in the autumn. If appointed, she would be the first woman to lead a major central bank (depending on where you place Russia, where Elvira Nabiullina took over the central bank this year).

But now, a backroom battle for the nomination appears to have spilled out into the open, with Larry Summers, President Bill Clinton’s Treasury Secretary and a former adviser to President Obama, reported to be putting his name forward.

The result is an unusual public debate about who should be handed the reins of American monetary policy at a time when the central bank is faced with the critical matter of rolling back its extraordinary stimulus measures. The liberal sprinkling of controversy in Mr Summers’ background has further sharpened the debate. The case for his appointment rests both on his iron-clad credentials as an economist – PhD from Harvard, winner of the John Bates Clark medal awarded to outstanding economists under 40, ex-World Bank chief economist – and his experience on the front lines of policy-making.

But his armour is not without some well-known (and embarrassing) chinks. Mr Summers was front and centre during the Clinton administration’s push to deregulate the financial sector, a drive that culminated in the now infamous repeal of the Glass-Steagall Act. The Depression-era law codified the separation of plain commercial banking and casino-like investment banking. In 2008, Mr Obama himself offered a neat summation of the post-crisis criticism of the push to erase the law, saying: “By the time the Glass-Steagall Act was repealed in 1999, the $300m lobbying effort that drove deregulation was more about facilitating mergers than creating an efficient regulatory framework.” Not that this view stopped Mr Obama from appointing Mr Summers to a top White House economic job.

Many within and beyond the President’s own party also recall the controversy that led to Mr Summers’ resignation from the presidency of Harvard University in 2006. He stepped down after seeming to suggest that men outperformed women in certain subjects owning to biological differences. Although he apologised for giving that impression, the episode has been highlighted by those opposed to his candidacy for the Fed, something that seemed to be a distinct possibility following leaks by “sources close to Obama”.

Ms Yellen is free of such controversies and brings experience from inside the Fed at a time when it ponders what is certain to be a deeply consequential shift in policy – and her credentials are just as impressive as Mr Summers’.

The policy shift, which concerns when and how to roll back the Fed’s programme of buying up $85bn of mortgage and government-bonds, will remain a key item on the central bank’s agenda until at least the middle of next year.

Although the central bank is independent, the White House can influence how the crisis-era policy evolves when it appoints the new head. With Mr Summers, it is likely that a big shift might be forthcoming, given recent sceptical comments about the effectiveness of quantitative easing. Ms Yellen, in contrast, has been part of Mr Bernanke’s inner circle since 2010 as the Fed refined its response to the crisis, prioritising, for example, policies to tackle the rising unemployment.

Democratic politicians have already begun marshalling their forces in the Senate (which will have to confirm the eventual nominee) to draft a letter to the President, reportedly signed by around a third of their ranks, backing Ms Yellen’s candidacy. Pointedly, perhaps, the letter doesn’t even mention Mr Summers, according to reports.

Head to head: The rivals

Larry Summers

Strength: Knows the world of politics as well as he knows his economic theory, having been a Treasury Secretary under President Bill Clinton and a former adviser to Barack Obama.

Weakness: A controversial past. Championed financial deregulation during the Clinton era. Resigned from Harvard after making comments that were interpreted as sexist. Has recently sounded doubtful about the Fed’s quantitative easing policies, suggesting that if he is appointed, the bank might be too quick to reverse its policies.

Janet Yellen

Strength: Has been at the Fed since 2010, working with  Ben Bernanke to shape its policies – experience seen as invaluable as the bank moves to cutting back its stimulus measures. That she would be the first woman to head the central bank may work in her favour.

Weakness: Few public critics have emerged. However, her appointment would probably be seen as a story of continuity after Mr Bernanke steps down, and she might lose out in the race for the job if the President wants to introduce some changes at the bank.

Clues: Fed statement

Questions about the next Fed chairman will take a (brief) back seat on Wednesday when the central bank publishes its latest policy statement. It will be released after  a two-day meeting of the bank’s policy-setting Open Market Committee, and will be pored over by economists and investors for clues about how soon we might see a reduction in the Fed’s $85bn bond-buying programme.

Previous statements, and comments from Mr Bernanke, suggest the first changes might be announced near the end of this year. But that could change depending on trends in economic data.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
Arts and Entertainment
Kara Tointon and Jeremy Piven star in Mr Selfridge
tvActress Kara Tointon on what to expect from Series 3
Voices
Winston Churchill, then prime minister, outside No 10 in June 1943
voicesA C Benson called him 'a horrid little fellow', George Orwell would have shot him, but what a giant he seems now, says DJ Taylor
News
i100
Sport
footballBrighton vs Arsenal match report
Arts and Entertainment
Benedict Cumberbatch has spoken about the lack of opportunities for black British actors in the UK
film
News
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Tax Assistant

Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...

Recruitment Genius: Outbound Sales Executive - OTE £25,000

£16000 - £25000 per annum: Recruitment Genius: This is an exciting opportunity...

Ashdown Group: Java Developer / J2EE Developer - Watford - £45,000 - £47,000

£45000 - £47000 per annum + bonus + benefits: Ashdown Group: Java Developer / ...

Ashdown Group: Marketing Product Manager - (Financial Services) - SW London

£35000 - £38000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

Day In a Page

Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

What the six wise men told Tony Blair

Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

25 years of The Independent on Sunday

The stories, the writers and the changes over the last quarter of a century
Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

Homeless Veterans appeal

As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

Smash hit go under the hammer

It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

The geeks who rocked the world

A new documentary looks back at origins of the computer-games industry
Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

Belle & Sebastian is taking a new direction

Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea
America: Land of the free, home of the political dynasty

America: Land of the free, home of the political dynasty

These days in the US things are pretty much stuck where they are, both in politics and society at large, says Rupert Cornwell
A graphic history of US civil rights – in comic book form

A graphic history of US civil rights – in comic book form

A veteran of the Fifties campaigns is inspiring a new generation of activists
Winston Churchill: the enigma of a British hero

Winston Churchill: the enigma of a British hero

A C Benson called him 'a horrid little fellow', George Orwell would have shot him, but what a giant he seems now, says DJ Taylor
Growing mussels: Precious freshwater shellfish are thriving in a unique green project

Growing mussels

Precious freshwater shellfish are thriving in a unique green project
Diana Krall: The jazz singer on being friends with Elton John, outer space and skiing in Dubai

Diana Krall interview

The jazz singer on being friends with Elton John, outer space and skiing in Dubai
Pinstriped for action: A glimpse of what the very rich man will be wearing this winter

Pinstriped for action

A glimpse of what the very rich man will be wearing this winter
Russell T Davies & Ben Cook: 'Our friendship flourished online. You can share some very revelatory moments at four in the morning…'

Russell T Davies & Ben Cook: How we met

'Our friendship flourished online. You can share some very revelatory moments at four in the morning…'
Bill Granger recipes: Our chef serves up his favourite Japanese dishes

Bill Granger's Japanese recipes

Stock up on mirin, soy and miso and you have the makings of everyday Japanese cuisine
Michael Calvin: How we need more Eric Cantonas to knock some sense into us

Michael Calvin's Last Word

How we need more Eric Cantonas to knock some sense into us