For better or worse, the Federal Reserve is no longer detached from public opinion about how the 100-year-old central bank should be run.
President Barack Obama nominated Janet Yellen today to succeed Ben S. Bernanke as Fed chief after unparalleled scrutiny during the selection process. Former Treasury Secretary Lawrence Summers, who had been the president’s favorite, withdrew from consideration on Sept. 15 after opposition from fellow Democrats, while Yellen, the Fed’s vice chairman, drew support from more than 400 economists, women’s groups, investors and politicians.
The unprecedented frenzy surrounding the nomination is an extension of the backlash that resulted from the Fed’s bailouts during the financial crisis and also reflects heightened concern about the economy after record monetary stimulus has failed to bring joblessness below 7 percent.
“The Fed has been absolutely in the middle of the hurricane here in the last five years,” James Bullard, president of the Federal Reserve Bank of St. Louis, said in a Sept. 20 interview at Bloomberg’s headquarters in New York. “So, I’m not surprised that, you know, Congress, the White House, the financial markets and the public at large are all very concerned about, well, who’s this person going to be?”
Bullard said the end of Bernanke’s second term -- on Jan. 31 -- provides “a good time to have a debate” about what the nation wants “out of its central bank.”
Yellen, 67, is poised to take over an institution that Bernanke, 59, established as the country’s main rescue agent during the 18-month recession that ended in June 2009. Bernanke gave out more than $2 trillion in emergency aid during the worst financial crisis since the Great Depression, including through the rescues of Bear Stearns Cos. and American International Group Inc.
After lowering his benchmark interest rate to near zero in December 2008, Bernanke has relied on unconventional stimulus measures to pursue the Fed’s goals of full employment and price stability, swelling the central bank’s balance sheet to a record of $3.75 trillion through three rounds of bond buying.
“The Fed used to be on the front page of the business section, and now it’s on the front page of the newspaper,” Randall Kroszner, a former Fed governor and now a University of Chicago professor, said Sept. 24 on a panel at the Bloomberg Markets 50 Summit in New York. The crisis changed the view of its power, which “now is very well known by people who aren’t monetary experts, and that’s going to keep it in the political cross-hairs.”
Senate and House Democrats have lobbied since July for Obama to choose Yellen. Nineteen Democratic senators and one independent -- led by Ohio Democrat Sherrod Brown -- signed a July 26 letter to the White House praising the former president of the San Francisco Fed and urging Obama to nominate her. A group of female House Democrats led by Maxine Waters of California also backed Yellen in a July 31 letter.
Sarah Binder, who researches the relationship between the Fed and Congress, said she doesn’t expect Senate Majority Leader Harry Reid, a Nevada Democrat, will have “a hard time” getting the 60 votes required for confirmation.
Republicans, who have criticized the Fed’s policies for risking inflation, were largely absent from the debate about Bernanke’s successor until today’s nomination. Senators including Mike Crapo of Idaho, the top Republican on the banking panel that has jurisdiction over Fed nominees, now are raising questions about Yellen’s record even as they predict she probably will be confirmed.
Summers’s chances were derailed after at least four Democrats on the Senate Banking Committee said they wouldn’t support him: Brown, Jon Tester of Montana, Oregon’s Jeff Merkley and Massachusetts’ Elizabeth Warren.
“We don’t really have a modern example of similar push back against a nominee,” said Binder, a senior fellow at the Brookings Institution in Washington. Most of the transitions “have been pretty quiet affairs.”
Binder said Summers’s history as an advocate of deregulation was the key to his demise, given the public’s disdain for bank bailouts and concern that the problem of so-called too-big-to-fail institutions hasn’t been resolved, even after the 2010 Dodd-Frank financial-overhaul legislation expanded the Fed’s supervisory powers.
When Summers, 58, withdrew, he cited a potentially “acrimonious” confirmation process.
“The hard work was done by a handful of liberal Democrats in the Senate caucus who really, intensely disagreed with his stand on financial regulation,” Binder said.
Summers also attracted criticism for remarks he made in 2005 while president of Harvard University hypothesizing that women might lack an “intrinsic aptitude” for science and engineering. The Washington-based National Organization for Women cited Summers’s “obnoxious views” as only “part of the problem” in a July 25 statement backing Yellen, who would be the first female chairman.
The unprecedented public debate about who would be the best choice to succeed Bernanke threatened the central bank’s independence, according to Richard Fisher, president of the Dallas Fed, who added that the Obama administration botched the nomination process.
“The White House has mishandled this terribly,” Fisher said Sept. 23 in response to a question from the audience after giving a speech in San Antonio, Texas. Choosing a new chairman “should not be a public debate,” and “we came within an inch of our lives of losing the independence that we have.”
The Fed “must never be a political instrument,” and the scrutiny of both Summers and Yellen has been “denigrating” for the candidates, Fisher said. The White House should handle future nominations “with more grace.”
Fisher has repeatedly cautioned that the Fed’s extraordinary stimulus measures risked opening up the central bank to political interference. He dissented twice in 2011 against moves to push down long-term borrowing costs and to keep the benchmark rate near zero for a prolonged period.
The intensity of attention on the selection process reflects dissatisfaction with the state of the economy, Binder said. The Fed is currently failing on both its mandates, with unemployment at 7.3 percent in August -- above the 5 percent rate in December 2007 when the recession began -- and prices accelerating at a 1.2 percent annual rate, according to the personal-consumption-expenditures price index. The Fed targets inflation of 2 percent.
“So long as the state of the economy remains a public interest, its natural focus is going to be on who leads the Fed,” Binder said.