Orlando's Outlook: Fed's three-ring circus
Bottom line For the first time in a quarter century, the chairman of the Federal Reserve will not attend the Fed’s annual monetary policy conference in Jackson Hole, Wyo., set for Aug. 22-24. Last April, Chairman Ben Bernanke announced he had a “personal scheduling conflict” that would prevent him from addressing the prestigious symposium, which was started by the Kansas City Fed in 1978 and routinely draws top central bankers from across the globe to the majestic Grand Teton mountain range to collaboratively discuss and resolve the economic problems of the world.
The significant read-through, of course, is that Bernanke was signaling that he had no interest in serving a third term as Fed chairman when his current term expires at the end of January 2014. But his thinly-veiled announcement has detonated a monetary policy explosion throughout Washington and Wall Street, and the ensuing parlor game has participants questioning why he quit, whether he was pushed, who will President Obama nominate to replace him, will the Senate eventually confirm the nominee in a timely fashion, and what will be the impact on Fed policy, economic growth and financial-market performance?
Why might Ben Bernanke wish to retire as Fed chairman? After eight stressful and hugely successful years, in which Chairman Bernanke and the Fed’s highly accommodative and creative monetary policy deserve the lion’s share of the credit for helping the U.S. economy exit the “Great Recession” and avoid financial Armageddon, we believe that there are three key reasons why Bernanke, 59, might want to do something else with his life come February 2014:
- Not feeling the love While we strongly believe that Chairman Bernanke has done a yeoman’s job under incredibly duress conditions, our view is not universally shared, with politically-inspired sniping from both the left and the right. Witness any of Chairman Bernanke’s semiannual Humphrey-Hawkins’ testimonies before Congress over the years. Members of the House Financial Services or the Senate Banking committees routinely pontificate for the cameras back home as Chairman Bernanke oozes the patience of Job and wisdom of Solomon in politely and respectfully addressing their half-baked questions. He’s had enough, and rightly so.
- Princeton beckons Chairman Bernanke wants to return to the relative safety and enjoyment of teaching economics at the hallowed ivy-covered halls. He already has tenure, so there’s certainly less pressure at Princeton compared with Washington.
- Monetize the moment He has at least one major book in him, and countless speaking engagements. What Chairman Bernanke earns now in a year of government service at the Fed he can make in an hour behind a podium. He’s more than earned the opportunity, and he deserves every nickel.
Why might President Obama prefer a new Fed chairman? Speaking to Charlie Rose of PBS in June about whether he would reappoint Chairman Bernanke if he wanted to stay for a third four-year term, President Obama said: “Well, I think Ben Bernanke’s done an outstanding job. Ben Bernanke’s … already stayed a lot longer than he wanted or he was supposed to.” Those comments set off a wave of speculation that perhaps Chairman Bernanke wasn’t welcome to return for a third term despite his superb track record. We believe that there are two principal reasons why President Obama might want to consider nominating a new Fed chairman:
- This Fed has been openly critical of fiscal-policy missteps Chairman Bernanke started his Federal Open Market Committee (FOMC) press conference on June 19 with prepared remarks that unleashed a consistently common refrain: “Based on its review of recent economic and financial developments, the Committee sees the economy continuing to grow at a moderate pace, notwithstanding the strong headwinds created by current federal fiscal policies (italics are ours).” The Bernanke Fed fervently believes that the root motivation for its highly accommodative monetary policy is to compensate for sub-optimal fiscal policy decisions over the past five years.
For example, Bill Dudley, president of the New York Fed and a close disciple of Chairman Bernanke, spoke at a lunch meeting with investment professionals last March, in which he detailed three prominent fiscal policy decisions—higher tax rates, the automatic spending sequester and the Affordable Care Act (ACA)—that will collectively reduce Gross Domestic Product (GDP) by 1.75% annually, according to the Fed’s own models. Four years into the recovery from the Great Recession, U.S. GDP is now growing at a 2.0-2.5% run rate, which is roughly half the typical 4.0-4.5% run rate that the U.S. economy had achieved four years into the recovery of previous nine recessions. So without the fiscal headwinds associated with those three controversial policy decisions, the current economic recovery might be closer to normal, and the Fed wouldn’t need to be quite as aggressive with its monetary policies.
Perhaps President Obama has grown tired of this sort of economic criticism—however fair and constructive—and he would prefer a Fed chairman who shares a more progressive point of view.
- The chance to make an historic impact We believe that President Obama, who himself is an historic and transformational icon, would love the opportunity to make a similarly historic choice for the next chairman—or chairwoman—of the Federal Reserve.
The field for Fed chair
Here is our evaluation of the dozen most-likely candidates that President Obama may consider, with his nomination for Senate confirmation coming sometime after the Fed completes its two-day FOMC meeting on Sept. 17-18:
- Janet Yellen The Fed’s current vice chairwoman under Chairman Bernanke, Dr. Yellen, 66, was previously chairwoman of the Council of Economic Advisers (CEA) under President Clinton and president of the San Francisco Fed. This uber-dove is an eminently qualified Bernanke disciple who would ensure a smooth transition at a critical inflection point at the Fed. We believe that Chairman Bernanke would like to personally commence the “QE to Infinity” tapering before he leaves office—perhaps laying the groundwork in September and executing a $15 billion taper in December—at which point he would need to pass the monetary-policy baton over to his successor to complete the program by the middle of 2014. Fed funds rates will likely stay near zero for another two years or so. While President Obama does not know Dr. Yellen well on a personal level, he recently received a supportive letter from the liberal wing of the Senate, indicating that Dr. Yellen would roller-skate through her confirmation hearings.
- Roger W. Ferguson, Jr. Currently the president and chief executive officer of TIAA-CREF, Dr. Ferguson, 61, holds a Ph.D. in Economics and a J.D. from Harvard University. He was a member of the Fed Board of Governors and served as vice chairman under Alan Greenspan. He has been a member of President Obama’s Council on Jobs and Competitiveness since 2011, and served on its predecessor, the Economic Recovery Advisory Board, so President Obama knows Dr. Ferguson well, and he could be an interesting compromise choice.
- Lawrence Summers With a reputation as one of the most brilliant economic policy minds today, Dr. Summers, 58, served as a domestic policy economist for the CEA under President Reagan, as chief economist of the World Bank, as undersecretary of the Treasury for International Affairs and as Treasury secretary for President Clinton, and as director of the National Economic Council (NEC) for President Obama, who has been actively floating his candidacy as Fed chairman in recent weeks. Dr. Summers was also president of Harvard University. Despite his fortress resume, however, the concern surrounding Dr. Summers’ possible Senate confirmation is a perceived lack of collegiality. With no ownership of Chairman Bernanke’s extraordinary policies, will Dr. Summers work well with the Fed’s 18 legacy members to smoothly unwind QE? Speculation is that he has long been interested in the job.
- Donald Kohn A 40-year veteran of the Federal Reserve System, Dr. Kohn, 70, was a member of the Fed Board of Governors and served as vice chairman of the Fed under Ben Bernanke. So like Dr. Yellen, Dr. Kohn offers the potential for a smooth leadership transition.
- Timothy Geithner Director of the International Monetary Fund (IMF), president and chief executive of the New York Fed (where he was a permanent member of the FOMC), and Treasury secretary under President Obama, Geithner, 51, worked closely with then-Treasury Secretary Henry Paulson and Chairman Bernanke in responding to the financial crisis. Speculation is that he does not want the job if offered.
- Christina Romer A professor of economics at Cal-Berkeley, Dr. Romer, 54, chaired the CEA under President Obama. She is also co-director of the program in Monetary Economics at the National Bureau of Economic Research (NBER), and she is a member of the Business Cycle Dating Committee. Like Chairman Bernanke, she is an expert on recessions, particularly the Great Depression, and she was the only woman in the inner circle of Mr. Obama’s economic advisers. If Dr. Yellen is not interested in the job for whatever reason, Dr. Romer’s candidacy may ascend.
- Alan Blinder A professor of economics at Princeton University, Dr. Blinder, 67, was a member of President Clinton’s original CEA as well as Fed vice chairman under Alan Greenspan.
- Austan Goolsbee On leave as a professor of economics from the University of Chicago, Dr. Goolsbee, 43, is the chief economist for President Obama’s Economic Recovery Advisory Board, and he was also the chairman of the CEA under President Obama. He was an economic adviser to President Obama’s 2004 Senate campaign before serving as a senior economic adviser to his 2008 presidential campaign, so President Obama knows him well, but his relative youth probably works against him here.
- Alan B. Krueger Currently on leave as a professor of economics from Princeton University, Dr. Krueger, 52, served as chief economist at the U.S. Department of Labor, and he is now the chairman of the CEA under President Obama.
- William Dudley Currently president of the New York Fed, Dr. Dudley, 61, was Goldman, Sachs’ chief U.S. economist for a decade. Extraordinarily articulate, Dudley is an uber-dove who is part of Chairman Bernanke’s inner circle.
- Jeremy Stein Presently a member of the Fed’s Board of Governors, Dr. Stein, 53, served in the Obama administration as a senior adviser to the Treasury Secretary and on the NEC staff.
- Stanley Fischer The outgoing governor of the Bank of Israel, Dr. Fischer, 69, is a classic dark-horse candidate who is well known in economic circles but anonymous to everyone else. He was also chief economist at the World Bank and first deputy managing director of the IMF. A Keynesian, Dr. Fisher is considered to be one of the most accomplished economists alive, and he was a professor of Ben Bernanke’s.
Research support provided by Federated Investors intern Matthew Flanagan