What Lies Ahead for the Fed

In a recent economic commentary (here’s the link), Bob Baur and I examined the pros and cons of the two top candidates to succeed Ben Bernanke as Chairman of the Federal Reserve: Janet Yellen and Larry Summers. Today, I’d like to use this blog post to examine a few different avenues where Yellen and Summers might differ were each to get the Fed’s top job.

The first way I’d look at this would be from their respective statements on Fed policy. Almost everything we’ve heard from Yellen suggests that she’ll be Spider-Man 2 to Bernanke’s Spider-Man…more of the same, still pretty good, but not saddled with the task of having to explain how this all started. Summers is harder to read. He’s actually had very little to say on the subject of monetary policy. Summers is admittedly more of a fiscal policy wonk, but more on that later.  We do have a couple of information points – the Financial Times gained access to Summers remarks at a Drobny Global conference in Santa Monica this April. I also found a transcript from a Wall Street Journal breakfast hosted for Summers sometime in June, and several questioners tried to pin him down on his monetary policy stance. The closest the WSJ breakfast got was an admission that quantitative easing could “increase the risk of [asset] bubbles.” In Santa Monica, Summers stated, “QE in my view is less efficacious for the real economy than most people suppose.” However, in that same speech, Summers did indicate that he thought QE was neither good or bad. “If QE won’t have a large effect on demand, it will not have a large effect on inflation either.”  Not exactly a stark difference to some opinions you’ll hear from certain Fed governors. That said, even though Summers may not be a fan of QE, like Yellen and Bernanke, he doesn’t think that the labor market is tight enough to lead to inflationary pressures. This suggests that Summers would still keep policy loose until the economy recovers.

There are, however, a couple of caveats to that view.  First off, at the Santa Monica conference, Summers laid out his outlook for the U.S. economy and it was more optimistic that the Fed’s official views. If he continues to be optimistic into 2014, as Fed chair, we could see him pull guidance of rate normalization forward.  In addition, Summers also worried that if the economy continues to grow slowly, then we will think potential output is lower; ergo, higher rates.

Given Summers’ preference for fiscal solutions, there’s also a possibility that a Summers’ Fed would have a light hand on the tiller, in an attempt to let the government apply force through fiscal policy. He’s not likely to dismantle QE overnight, but he also probably wouldn’t call for QE4 should the economy stumble in 2014.

There’s also the question of the Fed’s continued openness – what and how much the Fed says at meetings and elsewhere. Bernanke was very clear, beginning even before his tenure as chairman, that he wanted the Fed to be more transparent than it had been under Alan Greenspan. ‘Let the sun shine in’ has been Ben’s motto, and he started a virtual sunshine squad. Clearer language in FOMC statements. And more detail in FOMC statements. In fact, the length of FOMC statements about doubled from Greenspan’s time. The question now is how the new Fed chairman will handle that level of openness. As I mentioned before, Summers hasn’t had a lot to say on monetary policy. Now part of that might just be professional courtesy towards Bernanke, but you have to wonder that if he agreed with Bernanke’s policies, wouldn’t he be a bit more forthcoming about it? Yellen, on the other hand, seems to be following Bernanke’s lead well. She was communicating about explicit targets to govern Fed policy – one of Bernanke’s causes from way back in the early days – and she’s been very open throughout her tenure at the Fed. Again, Yellen seems like she’d be the easiest transition, while Summers brings a certain amount of uncertainty to the table. And, it’s entirely possible that this openness is the new norm, and it’ll continue regardless of who’s selected because the market now expects it and will react poorly if it receives any less.

The second difference we could see between the two contenders is in how they address the collaborative atmosphere that Bernanke has cultivated in his time at the Fed. Yellen has been party to and part of that collaborative culture, and likely would keep it in place. How about Summers? In the past, Summers has been accused of ignoring arguments he didn’t like. In a 2011 interview (pay wall) with the New York Times, he described taking the job as head of the National Economic Council like this,

“I said to the president when he asked me to do the job that I was a person who had strong views, and that I would make every effort to make sure that he was exposed to all perspectives and that each of those perspectives would be presented in as effective a way as possible. But if he wanted to maximize the feeling of kumbaya in the group, I wasn’t the right person.”

So, Summers might come down more on the side of “my way or the highway” than Yellen.

Either way the decision goes, communication of the new choice will have to be handled precisely and delicately. Remember, a Wall Street poll from CNBC showed that 70% of respondents felt that President Obama “will” pick Yellen. This is the same Wall Street that had a “taper tantrum when the Fed’s fairly general language on ending its program of quantitative easing turned into slightly specific language on ending its program of quantitative easing.

If Summers is selected when 70% of the Street thinks Yellen is the right woman for the job, there could be market repercussions. The repercussions would depend, of course, on how much it believes on the points addressed above. If Summers is selected, expect him to use his first few public appearances to hammer home the fact that he wants to ensure continuity with the previous regime. This is exactly what Bernanke did when it was announced that he was taking over from Alan Greenspan back in 2005.



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