The unprecedented frenzy surrounding Federal Reserve Chairman Ben S. Bernanke’s potential successor shows that Americans won’t let the central bank go back to its opaque and secretive ways.
The backlash that resulted from Bernanke’s bailouts during the financial crisis and his record expansion of the Fed’s balance sheet has pushed the central bank toward openness at the fastest pace in its 100-year history. His introduction of regular press conferences in 2011 is just one of his recent initiatives.
That scrutiny has persisted as the U.S. economy has struggled to gain momentum and led to an unparalleled public debate over the next chairman, according to Sarah Binder, a senior fellow at the Brookings Institution in Washington who researches the relationship between the Fed and Congress.
The central bank’s decision to adopt unconventional policies has “heightened consequences of what the Fed does and who leads it,” Binder said. Such action “has so much impact on the economy and people’s lives.”
Fed Vice Chairman Janet Yellen and Lawrence Summers, President Barack Obama’s former top economic adviser, have been the focus of an intensifying public contest for Bernanke’s job. House and Senate Democrats have penned letters to the White House voicing support for Yellen, 66, and Obama defended Summers, 58, to his party’s lawmakers on July 31 against a barrage of criticism. Obama also has mentioned former Fed Vice Chairman Donald Kohn, 70, as a candidate.
Yellen’s “institutional knowledge and working relationships with current board members would provide for a smooth transition at a time when financial markets and middle-class Americans are counting on” the Federal Open Market Committee to “demonstrate thoughtful and deliberate leadership,” a group of female House Democrats led by Maxine Waters of California, the ranking Democrat on the Financial Services Committee, said in a July 31 letter to Obama.
Obama said July 31 that Summers was being unfairly criticized and took the opportunity to praise the former director of his National Economic Council, who was by his side at the height of the financial crisis.
White House spokesman Jay Carney said people should “separate” Obama’s defense of Summers from speculation about whom the president will choose as the Fed chairman nominee.
While there have been many examples of senators lobbying “every president since George Washington” about appointments, Senate Historian Donald A. Ritchie said in an interview that he wasn’t aware of any such campaigns for Fed chief during the prior 14 confirmations.
“In the history of the Fed, there was never anything like this,” said Allan Meltzer, a professor of political economy at Carnegie Mellon University’s Tepper School of Business in Pittsburgh and the author of a multivolume history of the central bank.
Policy makers’ actions during the worst financial crisis since the Great Depression and its aftermath have been “fiscal in their nature” and invited political interference, he said.
Bernanke, 59, established the central bank’s role as the nation’s main rescue agent during the 18-month recession that began in December 2007 by using the Fed’s balance sheet to save Bear Stearns Cos. from collapse in March 2008. He gave out more than $2 trillion in emergency aid through that rescue and the rescue of American International Group Inc., six loan programs and currency swaps with other central banks.
With the target for the Fed’s benchmark rate stuck near zero since December 2008, Bernanke also has pursued three rounds of so-called quantitative easing that have swelled the central bank’s balance sheet to a record of more than $3.5 trillion.
Republicans, including House Speaker John Boehner of Ohio, have argued that the Fed’s stimulus programs have risked a rapid acceleration in prices. They’ve also championed a change in the Federal Reserve Act that would restrict the Fed’s focus solely to its goal of price stability, eliminating its full-employment mandate.
Inflation as measured by the personal consumption expenditures price index has averaged 1.9 percent since February 2006, the month Bernanke became chairman. The central bank has a 2 percent inflation goal.
“For the next chairman to get back to independence will require a very strong chairman -- a Volcker type -- and those are not easy to find and even harder to confirm in this totally politicized environment,” Meltzer said.
Paul Volcker, 85, is remembered for his battle against inflation during his 1979 to 1987 tenure, when he allowed the federal funds effective rate to rise as high as 22 percent to tame annual price acceleration approaching 15 percent.
Congressional scrutiny probably will continue through the Fed’s exit from its unprecedented monetary stimulus, according to Brookings’ Binder.
“Its unwinding of policies is going to go on for a while and continue to attract attention from Republicans who think they’re not going fast enough and Democrats who think they’re moving too fast,” Binder said.
Bernanke has said one reason the Fed’s balance sheet won’t prove inflationary is the central bank’s ability to pay interest on excess reserves; it can raise the rate to prevent prices from accelerating too quickly.
Traders and investors also are more focused on the central bank’s record balance sheet now than they’ve been before previous nominations, said Jeffrey Rosenberg, chief investment strategist for fixed income in New York at BlackRock Inc., which manages $1.2 trillion in fixed-income assets.
“The difference is the degree to which financial markets are influenced by central-bank activity,” he said. The Fed is “in a much larger position determining a broader array of financial prices beyond just short-dated interest rates.”
The Fed is buying $45 billion a month of Treasury securities and $40 billion a month of mortgage-backed securities in an effort to bring down 7.4 percent joblessness. It has extended more than $1 trillion worth of credit to the housing industry.
Policy makers are debating whether the economy is strong enough to warrant scaling back stimulus. While unemployment has fallen from a peak of 10 percent in October 2009, it is still above the 5 percent rate when the recession began.
One positive byproduct of all the attention the Fed has garnered is its increased transparency, according to Meltzer. Congress and the courts forced unprecedented disclosures of the Fed’s emergency loans after the crisis. Bloomberg LP, the parent of Bloomberg News, sued the Fed to force the release of details related to the lending.
Bernanke’s efforts to increase openness also include revealing policy makers’ interest-rate forecasts and announcing projections for economic growth, unemployment and inflation four times a year, compared with twice under former Chairman Alan Greenspan.
“The Fed’s role in the public’s mind has been enhanced” as it has “intervened more expansively in the economy than ever before,” said Marvin Goodfriend, an economics professor at Carnegie Mellon and a former adviser at the Richmond Fed. “As people become knowledgeable about the Fed’s powers, the Fed, in turn, has an interest in making itself more understandable. That’s a dynamic that’s likely to continue.”
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