New Fed Seen Unable to Return Genie of Secrecy to Bottles
Just five days after Federal Reserve Chairman Ben S. Bernanke’s June press conference, Narayana Kocherlakota decided to hold his own.
The Minneapolis Fed president held a surprise June 24 call with reporters and published some suggestions for the Fed panel that sets policy because he said it “provided insufficient detail” about future strategy. Kocherlakota, 49, isn’t even among the 12 voting members of the Federal Open Market Committee this year.
No matter. Bernanke, 59, has explicitly encouraged diverse views since becoming Fed chief in 2006, producing a cacophonous public debate on policy -- in direct contrast to the autocratic chairmanship of his predecessor, Alan Greenspan. District bank heads from San Francisco to Boston have enjoyed heightened influence, which will be difficult to restrain after Bernanke steps down in January, said Roberto Perli, a former member of the Fed board staff who attended Bernanke’s first meeting as chairman.
“Bernanke’s style has democratized the committee, and that is not something they are willing to let go of,” said Perli, now a partner at Cornerstone Macro LP in Washington. The next chairman will meet “significant resistance” if he or she tries to re-assert the “pre-eminence of the chairmanship.”
President Barack Obama in July mentioned three contenders to succeed Bernanke: Lawrence Summers, 58, his former National Economic Council director and Treasury Secretary under President Bill Clinton; current Fed Vice Chairman Janet Yellen, 67, and former Fed Vice Chairman Donald Kohn, 70. Whoever gets the job will inherit the most transparent Fed in the central bank’s 100-year history, with the 12 regional Fed bank presidents enjoying renewed influence.
“One of Bernanke’s original goals in going to the Fed was to both depersonalize and demystify the institution,” said Mark Gertler, a New York University economist who has co-written research with the U.S. central-bank chairman. Bernanke wanted to “have monetary policy more associated with the institution than with any single individual and also make clear to the public what was going into the mix.”
The heads of the Fed district banks have played a significant role in the central bank’s decisions to adopt untested stimulus tools in the aftermath of the worst recession since the Great Depression. James Bullard, 52, in St. Louis was a leading voice for open-ended quantitative easing before September 2012, when policy makers announced their third round of bond buying with no set end date or size.
The Fed also heeded on Dec. 12 the call of Chicago’s Charles Evans, 55, for tying potential changes in the benchmark lending rate to specific numeric goals for inflation and unemployment. Kocherlakota on April 16 advocated an even more aggressive approach: lowering the unemployment threshold to 5.5 percent from 6.5 percent.
One of the biggest ways Bernanke changed the culture of policy making was by restructuring discussion at FOMC meetings, said Robert Eisenbeis, chief monetary economist at Cumberland Advisors in Sarasota, Florida, and a former research director at the Atlanta Fed.
Under Greenspan, Fed governors and the regional bank presidents took turns describing their economic outlook, then Greenspan would voice his opinion on policy before his colleagues would have a chance to articulate theirs, Eisenbeis said. Greenspan’s approach stifled debate, and Bernanke now goes last, he said.
“Everybody else now puts their policy recommendations on the table before he does, and that radically changes the nature of the debate discussion, the sense of participation,” Eisenbeis said.
Bernanke also introduced at his first meeting as chairman the so-called two-handed intervention: Policy makers now raise two hands to interrupt the format of the meeting and challenge a point made by a colleague or staff member. Previously, members usually recited their views in turn.
By embracing their contributions and debate, Bernanke has assured that the core of the committee owns the policy signal, not the chairman. That’s also a shift from the Greenspan era.
One example: On April 30, 2003, Greenspan appeared before the House Financial Services Committee and said “substantial further disinflation would be an unwelcome development.”
Six days later, he told the FOMC, “I did try, incidentally, during my congressional testimony last Wednesday to open up the possibility that we might ease today,” according to a transcript of the meeting. “I raised for the first time the notion that falling inflation would be unwelcome.” The word “unwelcome” then appeared in the FOMC’s May 6 statement.
Bernanke rarely front-runs his colleagues. His semi-annual testimony in July, for example, was similar to his remarks at the June press conference. When he presented the possibility of a pullback this year in the central bank’s $85 billion pace of monthly bond purchases, Bernanke noted in both his testimony and news briefing that it was the committee’s decision.
Having the FOMC own the policy signal is “extremely important,” said Vincent Reinhart, former director of the board’s Division of Monetary Affairs, because that makes it harder for any single person, such as a new chairman, to dislodge.
“To signal is to say something about future votes,” so not only do the 12 members of the FOMC have to be on board but also a large majority of the 19 participants, said Reinhart, who is chief U.S. economist at Morgan Stanley in New York.
When fully staffed, the FOMC’s 12 voting members include the seven Washington-based governors and four regional Fed bank presidents who rotate as voters each year. The president of the New York Fed has a permanent vote.
The panel next meets Sept. 17-18 and is forecast to reduce the monthly pace of bond purchases intended to spur the economy by $10 billion, to $75 billion, according to the median of 34 responses in a Sept. 6 Bloomberg News survey of economists.
Part of the impetus behind Bernanke’s push to open up the central bank’s communications was to “help the markets understand what the Fed is going to do,” said Gertler. Making the institution “less mysterious” and policy-making “joint” has been positive, he said.
“It’s still the case that the chairman is the most powerful, but I do think how the chairman manages the committee is very important,” Gertler said. “I don’t think the chairman can drive off on his own and ignore the committee. Those days are over.”
Not all investors approve of the changes. Jim Paulsen, chief investment strategist at Wells Capital Management in Minneapolis, said he doesn’t like the “new touchy-feely communicating Fed” revealing “how the economic sausage is made.”
“Is there anyone in charge?” Paulsen said. “It seems like it creates a lot more volatility when 12 guys are running around the country talking out of both sides of their mouths.”
If Yellen replaces Bernanke, there probably won’t be a “significant change” in Fed tenor, given she’s “participated in the formation of that culture,” Eisenbeis said.
The vice chairman also would come to the job having established connections with reserve-bank presidents. Her calendars, obtained under the Freedom of Information Act, show more than 90 meetings by phone or in person with Fed district chiefs in 2011 and 2012, when she visited Boston, New York, Philadelphia, Atlanta, Cleveland, Chicago, Minneapolis and San Francisco, where she served as president from 2004 to 2010.
“We will never see a Fed chairman like Bernanke, but obviously Yellen has the opportunity” to work by consensus with her regional colleagues because “she has built relationships,” said former Fed governor Laurence Meyer, a senior managing director in Washington at Macroeconomic Advisers LLC.
Summers is by no means a replica of Bernanke, especially in personal style. He can be confrontational, even in settings of genteel policy debate.
At the 2005 Jackson Hole, Wyoming, Fed conference, Raghuram Rajan, then-director of research at the International Monetary Fund, presented a paper on how financial deregulation may create instability by concentrating risks on banks’ balance sheets through securitizations.
Rajan’s conclusions were provocative because the gathering was dedicated to celebrating Greenspan’s legacy. The former chairman had argued in speeches that securitization helped disperse risk. The paper by Rajan, who is now governor of the Reserve Bank of India, looks, in hindsight, like prophetic analysis of how the financial system was setting up for a crisis.
“If banks also face credit losses and there is uncertainty about where those losses are located, only the very few unimpeachable banks will receive the supply of liquidity,” Rajan wrote. “If these banks also lose confidence in their liquidity-short brethren, the inter-bank market could freeze up, and one could well have a full-blown financial crisis.”
Summers objected, saying he found “the basic, slightly Luddite premise of this paper to be largely misguided.” Central bankers in the audience winced.
Fed officials seem “comfortable with Bernanke’s style,” said Simon Johnson, a professor at the Massachusetts Institute of Technology’s Sloan School of Management and a columnist for Bloomberg View. Consensus-building and self-effacement “does not fit with the general understanding of how Larry Summers operates. Yellen would be much more in the Bernanke mold.”
Kohn worked at the Fed for 40 years and has strong relationships throughout the reserve-bank system. He was Bernanke’s most important adviser during the financial crisis, serving as vice chairman from 2006 to 2010, and supported active debate, especially since monetary policy was entering unprecedented territory. He is now a senior fellow at the Brookings Institution in Washington and serves on the Bank of England’s Financial Policy Committee.
Bernanke’s embrace of diverse views also means dissent is more common: There hasn’t been a unanimous decision on monetary policy since June 2011. Bernanke sees disagreement as a healthy sign of a committee doing its job.
One risk to this diversity of views is new appointments. In addition to the chairman, Obama also will name two governors to replace Elizabeth Duke, who resigned Aug. 31, and Sarah Bloom Raskin, whom Obama has nominated to be deputy Treasury secretary. Cleveland Fed President Sandra Pianalto will retire next year. Presidents are appointed for five-year terms by their banks’ boards, subject to approval by the Board of Governors.
Obama could give Bernanke’s successor a voice in his picks, leading to members who are more in line with the new chairman’s views or at least less likely to oppose them.
“I don’t think there’s any question” that the number of vacancies, coupled with a new chairman, could create a turning point in Fed culture, Eisenbeis said. “Bigger than we’ve ever seen before.”
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