Yellen Betting Defies 100-Year Jinx of Fed No. 2 Never ElevatedJoshua Zumbrun
Janet Yellen, the favorite to lead the Federal Reserve in a survey of economists, would need to overcome 100 years of history in which the central bank’s No. 2 official has never risen to the top job.
Yellen, the Fed’s vice chairman since October 2010, was given 65 percent odds of taking the helm at the Fed in January 2014 when Chairman Ben S. Bernanke’s second four-year term expires, according to a June 19-20 survey of 54 economists who follow the central bank. Her appointment would break another 100-year pattern by making her the first woman to lead the Fed.
None of the 19 vice chairmen in Fed history has ever been elevated, beginning with railroad magnate Frederic A. Delano who held the office in 1914-16. The list includes Ronald Ransom and C. Canby Balderston, now footnotes in the history of monetary policy after each served more than a decade in the No. 2 job. Those passed over most recently include Roger W. Ferguson Jr. and Donald Kohn, a 40-year Fed veteran.
“It’s often been the case that the members, including the vice chairman, are much less prominent than the Fed chairman,” said Allan Meltzer, a professor of political economy at Carnegie Mellon’s Tepper School of Business in Pittsburgh and the author of a multivolume history of the Fed. Yet the most important consideration may be the president’s relationship with the person he ends up appointing, Meltzer said.
“Presidents look for people who will be congenial to them, and the vice chairman might be somebody appointed by a previous administration,” he said.
That’s not the case with Yellen, whom Obama nominated for the vice chairmanship in 2010, meaning she may have a better chance of winning the office that has eluded all her predecessors.
During the last transition at the Fed, Vice Chairman Ferguson, an appointee of President Bill Clinton, was passed over as President George W. Bush opted for Bernanke, who advised the president during a stint as chairman of the Council of Economic Advisers. Alan Greenspan led a commission on Social Security during President Ronald Reagan’s first term before his appointment as Fed chairman in 1987.
Presidents have often opted to reappoint the central bank chairman, rather than elevate the vice chairman. Greenspan was reappointed by Presidents George H.W. Bush, twice by Clinton, and again by George W. Bush. Bernanke was appointed for a second term by Obama in 2010. Those reappointments scotched the chances of vice chairmen including Alan Blinder, Alice Rivlin and Kohn.
That pattern has been repeated in recent central bank appointments around the world.
The U.K. in November turned to Mark Carney, the head of the Bank of Canada, to take the reins at the Bank of England from Mervyn King, instead of King’s deputy Paul Tucker. Stephen Poloz, who led Canada’s export financing agency was picked in May as Carney’s replacement, bypassing Carney’s top deputy Tiff Macklem.
At the Bank of Israel, Governor Stanley Fischer is retiring, and Deputy Governor Karnit Flug was passed over in favor of JPMorgan Chase International Chairman Jacob Frenkel, who will be returning to the post that he also held from 1991 to 2000.
Speculation over succession at the U.S. central bank has grown after President Barack Obama said last week that Bernanke, 59, has stayed in his post “longer than he wanted,” one of his clearest signals yet that the Fed chief will leave. Obama hasn’t indicated who might replace Bernanke, and there are no signs that the White House has begun a formal search.
In the meantime the handicapping has focused on Yellen, 66, whose resume includes being a Fed governor from 1994 to 1997, the chairman of President Clinton’s Council of Economic Advisers from 1997 to 1999, and president of the San Francisco Fed from 2004 to 2010.
“Among people who have been vice chairman, I can’t think of any who have been more qualified than Janet,” said J. Alfred Broaddus Jr., former Richmond Fed president. “She’s got more experience in the Fed than maybe anybody else you could think of.”
The chairman requires Senate confirmation, making it likely that the White House would announce a nomination several months before Bernanke’s term officially expires in January, to avoid market turmoil that might result from an uncertain transition.
Fourteen men have served as the head of the central bank. The Fed has had 19 vice chairmen, of whom Yellen is the second woman to hold the office. Rivlin, a former director of the Office of Management and Budget, served in the post from 1996 to 1999.
The Senate confirmed Yellen’s nomination as vice chairman with a voice vote on Sept. 29, 2010. The Senate Banking Committee, which vetted her nomination, approved her with a vote of 17-6. All of the opposition came from Republicans.
Adam Posen, a former member of the Bank of England’s rate-setting Monetary Policy Committee, said Yellen’s apparent lack of a personal relationship with Obama could be an impediment to her appointment.
“It’s not a question of qualifications,” Posen said on a panel at a Bloomberg Washington Economic Summit in April. “I’m sure President Obama has high regard for Vice Chair Yellen, but I don’t get the sense that they’re particularly close.”
“In general, presidents appoint Federal Reserve chair people who they have some personal relationship with,” said Posen, who is president of the Peterson Institute for International Economics. Posen said today in an e-mail that his views haven’t changed since April.
Two other possible Fed picks have close ties to the president. Timothy F. Geithner, 51, Treasury secretary during Obama’s first term, was given a 10 percent chance of becoming the next chairman. Lawrence Summers, 58, who was an adviser to Obama on economic policy and served as Treasury secretary under Clinton, was given 9 percent odds, according to Bloomberg’s survey.
Ferguson, 61, the chief executive of TIAA-CREF, has 7 percent odds, while the Bank of Israel’s Fischer, 69, has a 4 percent chance, according to economists in the survey.
None is as closely tied to current policy as Yellen. As vice chairman, Yellen led a subcommittee that helped implement the Fed’s communications strategy and has never dissented from an FOMC action under Bernanke.
“I certainly think on the grounds of continuity, she is the obvious choice,” Danny Blanchflower, a former Bank of England policy maker and a professor at Dartmouth College, said in a June 21 interview with Kathleen Hays on Bloomberg Radio. “I think she’s highly capable and presumably would sail through confirmation.”