Beyond the Horse Race to Lead the Fed

As the horse race for Federal Reserve chair continues, I thought I’d take a second stab at trying to put the campaign for the Fed into perspective.  I offered a few thoughts the other day; here are a few more observations.

First, keep in mind that advice and consent for the chair of the Fed is a relatively new phenomenon.  The now familiar four-year term for the chair of the Federal Reserve Board of Governors dates to reform of the Federal Reserve Act in 1935.  But requiring Senate confirmation of the president’s nominee for service as chair is a product of Democratic-led reforms of the Fed in 1977, which included the imposition of the Fed’s dual mandate (directing the Fed to maximize both employment and price stability).  Requiring confirmation of the chair provided an avenue for the Senate to try to indirectly influence the course of monetary policy.   But given the newness of the requirement and given multiple terms for recent Fed chairs, there are relatively few chair “contests” against which to judge this open contest: there have been just four chairs since the reform in 1977.  And of course, even if there were more cases, it would be tough to compare the selections over time given the expansion and change in the Fed’s responsibilities over the past three plus decades—let alone the rise in political conflict over the Fed’s unconventional policies.  (As I suggested the other day, though, the public nature of the “campaign” is unprecedented.)

Second, although we have just a limited number of previous confirmation cases, I think it’s important to put the appointments into the broader context of presidential track records in securing confirmation for non-judicial appointments.  The long-term story here is that the president typically gets his man.  (Woman? Susan Rice would beg to differ.)   It’s hard to know though whether the Senate ultimately confirms most nominees because senators tend to defer to the president or because presidents anticipate potential objections and select their nominees to avoid a Senate contest.  It’s hard to distinguish between these accounts of course because they are observationally equivalent: High confirmation rates either way.  This does suggest that despite the strong support for Janet Yellen’s nomination in the Democratic Caucus, Larry Summers might readily secure sixty votes on the road to confirmation (barring a GOP challenge). That at least is what Senate majority leader Harry Reid suggested this week after the president’s visit with Senate Democrats: “Whoever the president selects, this caucus will be for that person, no matter who it is.”

Third, the remarkable change in the Fed’s responsibilities since the financial crisis (stemming from Dodd-Frank, the Fed’s pursuit of unconventional monetary policies, and Congress’s stalemate over fiscal policy) should encourage us to think about the Fed chair appointment in a new light.  Ezra Klein, for example, makes the important point that “There just isn’t a perfect candidate to be both the nation’s top central banker and the top financial regulator.”  Some additional implications worth considering:

—The expansion in the Fed’s formal and informal roles might increase the president’s leverage in the confirmation process: The Fed’s broader role allows the president to define the position in a way that justifies his preferred nominee.  By reportedly seeking someone who has the “ability to manage complexity and crisis,” Obama sets the stage for nominating a Summers over a Yellen (and thus to rationalize missing the opportunity to break the glass ceiling in Fed leadership).   We’re talking about an N of 1 here.  Still, I think the power of the president to frame how we think about the responsibilities of the post D0dd-Frank Fed probably increases his leverage in securing his nominee’s confirmation.

—The debate over who would be best suited to lead the Fed presages a potentially more complicated relationship between Congress and the Fed, whoever the president nominates.  In theory, Congress is far more likely to grant the Fed autonomy in conducting monetary policy than in carrying out its regulatory responsibilities.  But my hunch is that it will be increasingly difficult to divorce the two realms (looking out for both the stability of prices and the stability of financial markets) as Dodd-Frank is implemented and as the Fed grows into its twin roles. As Bernanke noted last month in reviewing the first century of the Fed, “The complementarities among regulatory and supervisory policies…lender-of-last resort policy, and standard monetary policy are increasingly evident.”  The more intertwined the Fed’s roles, the harder it will likely be for the Fed to protect its autonomy in setting monetary policy.

Finally, the political challenges the Fed faces in unwinding its unconventional monetary policies will be tough, regardless of who Obama taps as chair.  Those challenges will play out both within the Fed’s open market committee, in the Fed’s communications with the markets, and on Capitol Hill when the Fed encounters congressional push back on the pace of its exit strategy (undoubtedly too slow for the GOP, too fast for the Democrats).   That’s not to say that the president pick doesn’t matter. But the start to the Fed’s second century will be interesting regardless who takes Bernanke’s chair.