Fed Leadership Transition Looms

Short Article: Fed Leadership Transition Looms

By: Victoria Finkle

Pub. Date: April 10, 2017 Access Date: September 28, 2021 DOI: 10.1177/237455680311.n5 Source URL: http://businessresearcher.sagepub.com/sbr-1863-102582-2776875/20170410/short-article-fed-leadership-transition-looms ©2021 SAGE Publishing, Inc. All Rights Reserved. ©2021 SAGE Publishing, Inc. All Rights Reserved. “Uneasy politician” Yellen likely to be replaced Executive Summary

President Trump will have the opportunity to reshape the leadership of the U.S. Federal Reserve by naming a new chair and appointing several members to the central bank’s governing board. A key takeaway: The departure of Governor Daniel Tarullo will allow the president to name a vice chairman for supervision, the official in charge of bank regulation at the Fed. Full Article

Federal Reserve Chair Janet Yellen discusses the central bank’s decision to raise its benchmark interest rate at a news conference in March. (Chip Somodevilla/Getty Images)

The Federal Reserve is bracing for a significant transformation of its top brass over the next few years. The biggest change will be at the helm: the likely replacement of Janet Yellen as Fed chair. President Trump has indicated that he will name someone else to fill the job when Yellen’s term expires next February. “She is not a Republican. When her time is up, I would most likely replace her because of the fact that I think it would be appropriate,” he said in May 2016, during the campaign. 1 Ending Yellen’s tenure after just one term would be a departure from how the White House has operated in recent decades: President Barack Obama reappointed Ben S. Bernanke, Yellen’s predecessor, who was initially named by President George W. Bush; President Bill Clinton reappointed Alan Greenspan, an appointee of President Ronald Reagan; and Reagan reappointed Paul Volcker, first named by President Jimmy Carter. 2 An academic economist, Yellen is an “uneasy politician,” less inclined to mingle with lawmakers in Congress than some of her predecessors, The Wall Street Journal wrote earlier this year. 3 As a result, she’s been unable to win over Republicans and others critical of the Fed’s monetary policies in recent years, and the central bank is now facing some of the most intense political scrutiny in decades. 4 Still, that hasn’t stopped Yellen from following the path she’s charted for carefully raising interest rates over time.

“She seems extremely cautious” when it comes to raising rates, says Joel Naroff, president of Naroff Economic Advisors, a consulting firm in Holland, Pa. “She has the view, as she’s put it, that she has no problems with the economy running hot for a couple of years – which means she’d rather see stronger growth and higher inflation than weaker growth and lower inflation.” Whoever replaces her is unlikely to fit the same bill, and could prove more likely to raise rates faster, based on the potential nominees that have been cited in the press. “It’s doubtful that the next person will be less aggressive – she’s been really the restraining force behind rate hikes,” Naroff says. Yellen has said that even if she is replaced as chair, she could remain on the seven-person board until her term as governor ends in 2024. “That is a decision for another day,” she said in December. 5 Similarly, Stanley Fischer’s term as Fed vice chairman expires next summer, although he can remain on the board until 2020. 6 Possible names rumored for consideration to replace Yellen in the chair include Kevin Warsh, a former Fed governor; Glenn Hubbard, a Columbia University economist and former chairman of the White House’s Council of Economic Advisors; and John B. Taylor, a Stanford economics professor and former Treasury official. All three served under President George W. Bush. 7 “All these potential successors are monetary-policy hawks,” the Economist wrote of the three in March, using a term applied to policymakers who favor raising interest rates to hold inflation low. 8 (So-called doves, by contrast, typically advocate keeping interest rates low to help stimulate the economy.) Still, as observers have noted, drastic rate hikes could derail Trump’s promises to revive the economy. Keeping Yellen – or someone equally cautious – as chair could arguably prove to be more effective for the president’s long-term plans. “Little weight should be attached to Mr. Trump’s pledge to appoint someone more hawkish to replace Ms. Yellen,” Edward Luce, a commentator for the Financial Times, wrote in December. 9 “Republicans have a history of decrying loose monetary policy when in opposition but embracing it when in power.” A decision on Yellen’s future at the Fed is unlikely to come until closer to the end of her tenure. The Board of Governors already has two openings because President Barack Obama’s nominees, Allan Landon, the former chief executive of the Bank of Hawaii, and Kathryn Dominguez, an economics professor at the University of Michigan, failed to get a vote in the Republican-controlled Senate last term. 10 In addition to those, Governor Daniel Tarullo is stepping down, opening up another position on the board. Those positions, along with the chair, will be crucial for determining the future of monetary policy. Although the board shares the responsibility for rate decisions with the other members of the Federal Open Market Committee (FOMC), a rotating cast of regional reserve bank presidents, the board plays a leading role in those determinations. “The board always helps to direct the conversation because of their access to hundreds of economists and research,” says James Chessen, executive vice president and chief economist at the American Bankers Association. Liberal groups will be watching to see how new Fed members respond to the central bank’s dual mandate of maximum employment and price stability. Vice President Mike Pence and some lawmakers, including Sen. Bob Corker, R-Tenn., have pushed for a single mandate focused on inflation. Even if the employment mandate isn’t cut, the board’s priorities could shift in the direction of inflation without a statutory change. “Whether or not they amend the Federal Reserve Act to eliminate the full-employment mandate, you’re Joel Naroff: Yellen “seems probably going to see appointments to the Board of Governors that are people who don’t see the Fed’s extremely cautious” about role in fulfilling the full-employment mandate as important to its mission,” says Jordan Haedtler, manager of raising rates. a Federal Reserve watchdog group called “Fed Up,” organized by the Center for Popular Democracy, a left-leaning group. Tarullo’s departure, meanwhile, has been keenly anticipated by some in the banking industry. He served as the de facto vice chairman for supervision, a position created under the Dodd-Frank Act, although he was never confirmed for the position by the Senate. He has been a vocal advocate of strong capital requirements for banks, so that they would be adequately cushioned from failure in the event of another crisis. “Tarullo was a force of nature, particularly on the capital side, and certainly that created some heartburn in terms of the policy and how it was pulled together,” Chessen says. Several names have been floated as potential replacements for Tarullo, although one of the top candidates, David Nason, an executive at General Electric‘s finance unit, took himself out of the running in March – to the surprise of many in the financial industry. 11 “The Trump administration will ultimately tap a deregulatory nominee, but the void at the top of the candidate list suggests that the timeline for relief is slipping,” wrote Isaac Boltansky, a policy analyst at the Washington-based investment banking firm Compass Point Research

& Trading, in a note to clients after Nason’s decision. He added that since the confirmation process can take several months, a vice chairman for supervision is unlikely to be installed at the Fed before the fall. 12 About the Author

Victoria Finkle is a freelance journalist based in Washington, D.C., who focuses on business, banking and public policy. She has written for the New York Times, Inc. magazine, Bloomberg BNA and Washington Monthly, and previously worked as a staff writer for the American Banker newspaper, covering Capitol Hill and consumer finance. Her previous reports for SAGE Business Researcher were on behavioral economics, financial technology and shadow banking. Notes

[1] Kate Davidson, “Donald Trump’s Comments on the Fed, Interest Rate Policy and Janet Yellen,” The Wall Street Journal, Nov. 9, 2016, http://tinyurl.com/nxte59v. [2] John Canally, “Evaluating the Economics of the President-Elect,” Advisor Perspectives, Nov. 16, 2016, http://tinyurl.com/lfvq9oh. [3] Kate Davidson, “The Uneasy Politician: Janet Yellen Is Struggling to Fend Off the Fed’s Many Critics,” The Wall Street Journal, Feb. 1, 2017, http://tinyurl.com/kpskned. [4] Ibid. [5] Greg Robb, “Yellen floats idea of staying at Fed after her term as chairwoman ends,” MarketWatch, Dec. 14, 2016, http://tinyurl.com/mksudhd. [6] “Board of Governors of the Federal Reserve System,” Federal Reserve, last updated Feb. 22, 2017, http://tinyurl.com/jcgt3qu. [7] Rich Miller, “Potential Fed Chairs Suggest They’d Pursue Tighter Policy,” Bloomberg, Jan. 9, 2017, http://tinyurl.com/keg9jxy. [8] “As the Fed raises rates, Janet Yellen’s legacy is pondered,” The Economist, March 18, 2017, http://tinyurl.com/zd6ulvo. [9] Edward Luce, “The Dangers of Donald Trump’s Coming Boom,” Financial Times, Dec. 11, 2016, http://tinyurl.com/m5hgk5q. [10] Christopher Condon and Cheyenne Hopkins, “Fed Nominees Fade Into Oblivion as Election Year Looms,” Bloomberg, Dec. 10, 2015, http://tinyurl.com/mznwacq. [11] Ryan Tracy and Kate Davidson, “David Nason, Candidate for Fed Regulatory Job, Takes Himself Out of Running,” The Wall Street Journal, March 8, 2017, http://tinyurl.com/larmvww. [12] Isaac Boltansky, “Fed Vice Chair Thoughts,” March 9, 2017, http://tinyurl.com/lrjaaqu.

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