It was supposed to be a fait accompli. Janet Yellen was going to be the next Fed Chair, and anyone who said otherwise was some combination of trolling, wrong, and wrong. Betting markets certainly thought so: Yellen started out as a 1-to-5 favorite to get the gig. But a not-so-funny thing happened on the way to our first female Fed Chair -- Ezra Klein reports that Larry Summers is actually the frontrunner for the job now.
It's not an easy question to answer. It's not that Summers isn't a brilliant economist -- he most certainly is -- but rather that he doesn't have, well, any of Yellen's central banking expertise. She's spent much of the past 20 years at the Fed. He's barely said anything about monetary policy. Now, he might be as good as we know she would be, but that's the thing: We know she would be good. Very, very good.
After serving as a Fed governor from 1994 to 1997, as president of the San Francisco Fed from 2004 to 2010, and as Fed Vice-Chair for the past three years, Yellen has emerged as one of the central bank's intellectual leaders. She talked Alan Greenspan out of targeting zero percent inflation, because it would have increased the odds of falling into a liquidity trap (like we have now), back in 1996. She was one of the first to warn about the risk of the shadow banking blowup and housing slump setting off a credit crunch back in 2007. And she's been one of the architects of the Fed's unconventional policies today.
It hasn't gotten a lot of attention, but Yellen is something of a quiet revolutionary. Now, I prefer Christina Romer's approach of, if not yelling, at least speaking loudly from the rooftops that the Fed needs to do more (it's a scandal that she hasn't gotten real consideration for Fed Chair). But Yellen has cautiously moved the Fed in that direction. As Cardiff Garcia of FT Alphaville points out, her idea of "optimal control" policy looks an awful lot like NGDP targeting. In plain English, she thinks the Fed should let inflation go higher than it likes for a little while to bring unemployment down faster. Not that this is a new idea for her. It's what she said the Fed should do at a policy meeting in 1995 (page 43):
Fortunately, the goals of price stability and output stability are often in harmony, but when the goals conflict and it comes to calling for tough trade-offs, to me, a wise and humane policy is occasionally to let inflation rise even when inflation is running above target.
As a colleague noted, she was all but endorsing NGDP targeting, which she then agreed was a "sensible rule." And it's even more sensible when interest rates are at zero.
It isn't clear what Larry Summers actually thinks about monetary policy. He probably wants to keep rates low for a long time, but that's about all we know. He hasn't been a central banker. And he hasn't written much about it. But the few things he has said aren't encouraging. For one, he doesn't think much of quantitative easing. As Robin Harding of the Financial Times reports, Summers recently said that he thinks "QE is less efficacious for the real economy than most people suppose." But more than that, Summers seems to share the Wall Street view that more bond-buying might just risk another bubble or mal-investment -- at least that's what he suggested a year ago:
Many in both the U.S. and Europe are arguing for further quantitative easing to bring down longer-term interest rates. This may be appropriate given that there is a much greater danger from policy inaction to current economic weakness than to overreacting.
However, one has to wonder how much investment businesses are unwilling to undertake at extraordinarily low interest rates that they would be willing to undertake with rates reduced by yet another 25 or 50 basis points. It is also worth querying the quality of projects that businesses judge unprofitable at a -60 basis point real interest rate but choose to undertake at a still more negative real interest rate. There is also the question of whether extremely low safe real interest rates promote bubbles of various kinds.
In other words, he thinks the Fed pushing down real interest rates might only push companies to make bad investments they otherwise wouldn't make. It's a very Austrian view of things -- the idea that pushing interest rates "artificially" low makes businesses make mistakes.