For some reason, the Obama administration seems determined not to pick Janet Yellen as the next Fed Chair.
It's odd. Yellen is the current Fed number two, she was a Fed governor and regional president before that, and she's been one of the intellectual architects of its unconventional policies. In other words, she's an almost perfect candidate -- and it would take a really perfect candidate like Christina Romer to justify picking anybody else. But, as Annie Lowrey and Binyamin Appelbaum report, Yellen has bad blood with Obama's chief economic adviser Gene Sperling going back to when they served in the Clinton administration, and that's been enough to make them look elsewhere.
That elsewhere was Larry Summers. But the backlash against him has been so intense -- 18 Senate Democrats sent Obama a letter conspicuously endorsing Yellen in response -- that they're going to need a new elsewhere. Now, in a better world that elsewhere wouldn't be one at all. It'd be Janet Yellen. As I've explained, I think she's the better choice than Summers, or any other contender, on the monetary policy-making merits. But the administration has apparently decided she's seen as too soft on inflation to have much credibility with markets when it's time to tighten -- which means she'd end up having to tighten even more. Of course, this is a mostly made-up argument by people who have worked on Wall Street to keep out people who haven't. But hey, you've got to throw something against the wall if you're going to ignore the obvious candidate.
So where does that leave the administration? Well, Ezra Klein reports that if Summers really has been trial ballooned out of the job that a darkhorse like Roger Ferguson might get it rather than Yellen. Now, Ferguson doesn't have the name recognition of the other contenders -- that's what makes him a darkhorse! -- but he does have the resume to be taken very seriously. He's currently the president and CEO of institutional investing behemoth TIAA-CREF, and before that he was a Fed governor and Vice-Chair from 1997 to 2006. In other words, he has both the market and policymaking chops the administration wants.
It looks like there would be a lot of continuity between a Ferguson Fed and the Bernanke Fed. (They were colleagues, after all). Both think a determined central bank can still boost the economy when short-term interest rates hit zero -- a so-called liquidity trap -- though how much is uncertain. As you can see below, Ferguson cautiously supported QE2 back in 2010, when conservatives really started attacking the Fed, in much the same terms as Bernanke: It wasn't clear how much bond-buying would help, but it was worth trying, potential costs notwithstanding.
Not that this was new for him. Ferguson has thought about what central banks can do in a liquidity trap for a long time, and has supported unconventional policies for about as long. Indeed, back in 2003, he gave a speech at the Bank for International Settlements (BIS), the central bank for central banks, that was quite Bernanke-ian. Looking at Japan's lost decade and our then near-falling prices, Ferguson listed the dangers of deflation -- higher real rates, higher debt burdens, and harder real wage adjustments -- and asked what central banks could do about it in a liquidity trap. Plenty, he answered. Central banks could buy longer-term bonds to push down longer-term borrowing costs. Or they could promise to keep short-term rates at zero for a long time. These are, of course, exactly what the Bernanke Fed has done the past few years -- the former is what economists call quantitative easing and the latter forward guidance.
A few weeks later, Ferguson thought the Fed needed to get ready to take these unconventional tools out of the kit. Remember, back in mid-2003, the economy was stuck in a jobless recovery that was literally so: unemployment was still rising even as inflation and interest rates were falling uncomfortably close to zero. It sure looked like an economy that was turning Japanese rather than turning the corner. And Ferguson didn't want to wait too long, like he thought the Bank of Japan had, to do something about it. Here's what he said during the Fed's policy meeting that June (pages 51-52):
So that inclines me, while not to a decisive conclusion, toward a pure quantitative
approach and a focus on reserves for a couple of reasons. One is that in some sense we have operated quite successfully that way both in the emergencies of September 11 and more broadly. It is something that central banks certainly know how to do, and we can communicate reserve targeting very clearly. I accept the fact that the interactions between pure quantitative easing and the outcome with respect to the real economy are potentially uncertain, but that ties back to the need to communicate clearly.
So I conclude, as Governor Bernanke did, that we really are thinking about here is a package of quantitative operations and communications. Though my comments are divided into what to say and what to do, the reality is that they work in tandem. Therefore, I believe we ought to be thinking about using both of those tools simultaneously.
In other words, he wanted the Fed to think about doing then what it's doing now. So there wouldn't be much difference between a Ferguson Fed and the Bernanke Fed. It would promise to keep rates low for long to keep the recovery on track, and it would buy bonds when necessary to keep inflation on track. (And it wouldn't taper its bond-buying until core PCE inflation, which just hit a 50-year low, gets closer to target). It'd be a good, but maybe not good enough, Fed.
But Ferguson does have a big, red flag draped around him. That's his record as a regulator. As Neil Irwin of the Washington Post points out, Ferguson was in charge of the Fed's bank supervision during the bubble years -- and that didn't exactly go well. It's particularly damaging because the next Fed Chair will have to decide just how forcefully to enforce all the new rules in Dodd-Frank -- which is why Senate Democrats are so keen that whoever it is be a good regulator.
There are plenty of reasons to like Ferguson as the next Fed Chair, but none to like him more than Yellen. They both have experience as central bankers. And they both have experience thinking about central banking in a liquidity trap. But Ferguson has only thought about these things. Yellen has done them. And she's done them with the people the next Fed Chair is going to have do them with. That matters. Now, Yellen's collaborative style sometimes gets attacked (and Ezra Klein is right that there are hints of sexism in these attacks), but consensus-building is a plus at the Fed. Monetary policy is all about credibility, and in a liquidity trap, credibility is all about durability. With rates at zero, the Fed has to make promises about what it will do tomorrow to get the economy moving today. But that won't work if there isn't a solid enough majority to make markets think that those promises will stick. In other words, the Fed needs a persuader-in-chief. It needs Yellen.
Monetary policy might be hard, but this shouldn't be.