Washington & Wall Street: Time for Senate Republicans to Deal on Fed

Fed Chairman Ben Bernanke is expected leave office at the end of his term on February 1st, 2014.  Do Republicans in the Senate have any thoughts on successors for the next Fed Chairman?  Not so far, at least measured by public statements. Bernanke’s term as a Board member ends January 31, 2020, so he could simply stay on for another six years. And there might be good reason for Bernanke to stay given the recent history of filling empty spots on the Fed's seven member board. The Fed is about to see significant turnover, providing an opportunity for astute Senate Republicans – if there are any. 

President Obama has already appointed Governor Sarah Bloom Raskin as the US Treasury Department's No. 2 official. Two other governors have indicated that they intend to leave, my friend David Kotok of Cumberland Advisors tells his clients:

“Looking at the rest of the board, one can see the possibility of substantial change in the Fed board within one year, say, if Ben Bernanke is replaced by Lawrence Summers, Janet Yellen leaves because she was not selected, and Sarah Bloom Raskin moves to the Treasury. Elizabeth Duke has already indicated she is leaving, and Jerome Powell’s term ends in 2014. The Fed board’s current composition of seven experienced members could be reduced to Jeremy Stein, Daniel Tarullo, and five new people…  It is quite possible that we might confront 4 or 5 new governors making decisions that are based upon their experience and knowledge, but not with the experience of surviving the financial crisis or implementing a new monetary policy. It would be an interesting switch to see the reserve bank presidents, seasoned as they have been by the fires of the financial crisis, acting as the historical memory of the FOMC, while the governors are mostly “newbies” when it comes to actual policy decision making under the fire of an emergency.”

The impending turnover at the Fed is an opportunity for Republicans to demand at least two selections to balance the socialist, pro-intervention tendency that now guides the Federal Open Market Committee. Even with his hearty support for the hundreds of billions of dollars in monetary emissions over the past five years, Ben Bernanke is probably among the more conservative members of the FOMC.  

Yellen is a reliable vote for aggressive monetary expansion, but has support among moderate Republicans like former FDIC Chairman Sheila Bair. Yellen is clearly the most qualified successor to follow Ben Bernanke. There is no reason to pass her over for less-qualified males,” she argues, and continues:

“Instead of resisting Yellen's nomination, those wanting greater policy balance at the Fed should focus on who will fill the Vice-Chair vacancy -- which opens up if Yellen gets the top job -- as well as the vacancy created by Governor Betsy Duke's recent resignation. The country would be well served by filling these openings with people who are a bit more hawkish when setting the Fed's priorities.” 

Bair notes that Yellen is drawn from the ranks of Federal Reserve Presidents and adds that very qualified people like FDIC Vice Chairman Tom Hoenig, Esther George, and Jeff Lacker are all available for President Obama to select as Fed Vice Chairman. 

During the hearings for the next Fed chairman, members of the Senate need to ask some tough questions about what precisely the central bank purchased with over $800 billion worth of “quantitative easing.” In monetary terms, the Fed’s QE has been a sop to deserving financial houses by acquiring massive amounts of public debt.  The Fed’s operations amount to the liberal equivalent of “trickle down” economics by efficiently passing public subsidies to large corporations and sophisticated investors. But one can also argue that the key transmission belt for monetary policy, namely housing, has not benefitted from QE and other monetary emissions as advertised.

For years now, Republican Senators have blocked the nomination of the economist Peter Diamond to the Federal Reserve Board of Governors, making any negotiations with the White House regarding Fed appointments problematic. Diamond just won the Nobel Prize in economics, but ranking Republican Richard Shelby (R-AL) is having none of it. “While the Nobel Prize for Economics is a significant recognition, the Royal Swedish Academy of Sciences does not determine who is qualified to serve on the Board of Governors of the Federal Reserve System,” Mr. Shelby said, according to the spokesman. Shelby was not one of the Republicans to put a hold on Mr. Diamond’s nomination but did vote against his nomination when it came before the Banking Committee.

By next year, however, more than one seat is going to be in play on the Fed board, including Fed Chairman, the most powerful appointed position in the federal government. It is time for the Senate Republicans to start thinking about their requirements for candidates in a constructive way. With more seats in play, perhaps a resolution can be reached with the White House regarding the Diamond nomination.  

But can Shelby and the other Senate Republicans cut a deal with the White House before the 2014 election season begins? PIMCO's Mohamed A. El-Erian told The Washington Post: “The longer the current debate continues, the greater the risk of collateral damage and unintended consequences."


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