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.

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