Does it really matter who President Obama nominates to succeed Ben Bernanke as chairman of the Federal Reserve?
Well, yes and no.
Yes because whoever is chosen will bring their own leadership style to the immensely powerful position and that style will undoubtedly influence and color the entire institution. And no because the Fed’s mandate for the next few years -- winding down the extraordinary measures put in place in the wake of the 2008 financial crisis -- isn’t likely to change much regardless of who Obama nominates.
The two leading candidates to replace Bernanke when his term ends in January couldn’t be more different: current Fed Vice-Chair Janet Yellen, the quiet academic seen as a behind-the-scenes consensus builder, and the brash Larry Summers, a consummate Washington insider known for ruffling feathers wherever he’s perched.
Yellen and Summers will certainly offer contrasting styles of leadership, a point not lost on supporters and opponents of both candidates.
"... the difference in conducting monetary policy between the two will be minimal in the next years."
- Lars Christensen, Danske Bank analyst
Yellen is widely seen as Bernanke’s natural successor, a veteran Fed hand who not only agrees with Bernanke’s interventionist monetary policies but who would also maintain what might be Bernanke’s primary legacy – the dramatic increase in transparency at the once-insular central bank.
Summers, a former Treasury Secretary under President Bill Clinton and top economic advisor during Obama’s first term, isn’t known as a consensus builder. Rather he’s recognized as an uncommonly brilliant economist who strongly trusts his own instincts, a potentially problematic trait given the collegial atmosphere Bernanke has fostered at the Fed.
Mark Williams, a former Fed examiner who now teaches banking at Boston University, said the Fed chief’s personality and leadership style play a big role in how the Fed is viewed by global markets.
“Leadership Sets the Tone”
“It absolutely matters who sits in the corner office,” he said. “The leadership sets the tone at the top.”
Williams served at the Fed under Alan Greenspan, an almost mythical figure during his nearly two decades at the central bank’s helm. “Everyone hung on his every word,” Williams said of Greenspan’s infrequent and often cryptic public comments.
Greenspan, according to Williams, used his votes as a member of the Federal Open Market Committee, which sets most Fed policy, to send a clear message to other voting members of the FOMC. When he wanted the other members to support him and vote with him on an important issue he voted first to let them know where he stood. When the issue was less of a priority to him he voted last.
Williams said Greenspan’s style evoked a sense of confidence, a feeling across securities markets that the Fed knew what it was doing and that all the members were on the same page. (In hindsight, perhaps the markets shouldn’t have been so trusting of Greenspan’s grasp of economic conditions).
Bernanke’s emphasis on increased transparency, on the other hand, has frequently left markets confused, especially after public statements by Fed members sent mixed messages regarding when and how the central bank should begin scaling back its $85 billion in monthly bond purchases known as quantitative easing.
The Fed has attempted in recent weeks to unify that message, apparently in preparation for the gradual phasing out of the easy-money policies in place now for nearly five years. Since late 2008 the Fed has increased its balance sheet to $3.6 trillion and kept interest rates at near zero in an effort to goose the staggering U.S. economy.
But as the economy has shown signs of gradual healing and the unemployment rate has ticked lower pressure has risen to shut down the stimulus. The markets seem resigned to so-called tapering, possibly as early as September.
If the economic data continue to improve, the Fed’s mandate should remain clear for the next few years – unwind the unprecedented actions taken over the last five years without threatening the fragile recovery.
"Minimal" Difference in Conducting Monetary Policy
If that’s how things play out then it shouldn’t make much difference whether Yellen or Summers is leading the Fed, despite their well-publicized differences in leadership styles and policy preferences.
“Yellen supports using unconventional monetary policy tools like quantitative easing, while Summers is skeptical regarding its effect and is more likely to put pressure on the politicians to use fiscal policy to stimulate aggregate demand,” Lars Christensen, chief analyst at Danske Bank, said in a recent research note. “This difference is important if the U.S. is hit by a large negative shock in the coming years – otherwise we believe the difference in conducting monetary policy between the two will be minimal in the next years.”
If, however, the recovery stalls or goes into reverse the differences between Yellen and Summers will become starkly apparent.
Williams believes Yellen is far more likely to initiate another round of bond purchases, or QE4, than Summers, who could be expected to use the bully pulpit of the Fed chair to push Congress toward stimulating the economy through tax reforms or shifts in government spending.
Broader transparency, meanwhile, is likely to remain under either Yellen or Summers. “Can you put the toothpaste back in the tube? Probably not. At this point the Fed can’t dial back and provide less information,” said Williams.
In any case, Obama is apparently not too concerned with continuity of leadership style since he appears to be leaning toward nominating Summers. The hope is that the economy continues to recover and the Fed’s mandate moves forward unchanged. In which case it won’t make much difference who’s in charge.