Fischer as Financial Statesman May Help Fed Smooth QE Unwinding

In Stanley Fischer, the Federal Reserve would gain a financial statesman with contacts and credibility around the world as it begins to pull back on record stimulus, possibly unsettling foreign markets.

Fischer, 70, was picked yesterday to be Fed vice chairman just as U.S. officials start to slow bond purchases. The tapering and eventual monetary tightening could roil emerging markets as higher rates here pull investment flows from higher-yielding, higher-risk stocks and debt. Chairman Ben S. Bernanke acknowledged the potential fallout in September, saying, “we are watching those developments very carefully.”

Fischer has spent much of the past quarter century near the top of global economic policy making, helping arrange bailouts for Mexico and Brazil while he was the No. 2 official at the International Monetary Fund in the 1990s. If approved by the Senate, he’ll bring experience that can help the Fed monitor the impact of its policies abroad and make him an ambassador who explains the U.S. central bank’s intentions and goals.

“Here is a guy who trained half of the central bankers in the world. He knows them,” said former Fed Vice Chairman Donald Kohn, a senior fellow at the Brookings Institution. Fischer “is tremendously respected everywhere in the world, not only by central bankers but by finance ministers and prime ministers.”

President Barack Obama also asked Lael Brainard, formerly the U.S. Treasury Department’s top international official, to fill an empty seat on the board, and a current governor, Jerome Powell, to serve a second term, according to a statement from the White House.

Global Uncertainty

The selections come at a time when the global economic outlook remains clouded, and U.S. officials are seeking more cross-border coordination in regulating banks. They also follow a trend by other governments to seek out leaders with international experience to help run their central banks.

The U.K. government appointed Canadian Mark Carney to run the Bank of England and Jon Cunliffe -- who, like Brainard, is a former Group of Eight negotiator -- to serve as one of his deputies. Raghuram Rajan, hired last year as governor of the Reserve Bank of India, was previously chief economist at the IMF. Graeme Wheeler, a former World Bank official, was hired in 2012 to be governor of the Reserve Bank of New Zealand.

“Their knowledge and awareness of international economies and markets and familiarity with international policy makers is an argument in favor of them,” said John Lipsky, a former first deputy managing director of the IMF, adding they also had other qualifications.

Emerging Markets

The MSCI Emerging Markets index touched a four-month low last week as capital flows shifted in the wake of the Fed’s decision to trim its longer-term bond purchases on Dec. 18. The index increased 0.7 percent yesterday to 970.15, paring its drop for the week to 1 percent. The measure for emerging-market stocks has dropped 3.3 percent this year after trailing shares in developed countries by the most since 1998 in 2013.

“Many in emerging markets and particularly their central banks are increasingly concerned about what the Fed is doing and how this pullback will happen,” said Thomas Costerg, a financial markets economist at Standard Chartered Plc in New York.

Obama is reshaping the Fed board as the central bank tackles some of the biggest challenges in its 100-year history.

The Fed’s balance sheet stands at $4.03 trillion as it buys longer-term debt to keep interest rates low to encourage consumer spending and capital investment. The Fed took the first step to slow the program down in December, agreeing to trim purchases to $75 billion a month from $85 billion starting this month.

Yellen’s Promotion

Fischer would replace Janet Yellen, who was approved by the Senate this week for the chairmanship of the U.S. central bank. Bernanke’s term expires Jan. 31.

Fischer “is widely acknowledged as one of the world’s leading and most experienced economic policy minds, and I’m grateful he has agreed to take on this new role,” Obama said in the statement. “I am confident that he and Janet Yellen will make a great team.”

Fischer said in a statement that he was “deeply honored” by the nomination.

The central bank is keeping a close watch on labor markets, where the recovery in employment is “far from complete,” Bernanke said last month.

Payrolls increased in December at the slowest pace in almost three years. The 74,000 gain followed a revised 241,000 advance the prior month, Labor Department figures showed yesterday in Washington. While the unemployment rate dropped to 6.7 percent, the lowest level since October 2008, the reason for the decline was more people leaving the labor force.

Second Fiddle

The Fed’s No. 2 has traditionally been the chairman’s most important ally on the board and is given a significant assignment.

Roger Ferguson, vice chairman from 1999 to 2006, helped guide the financial system through potential computer failures at the turn of the century and managed the Fed’s initial response to the Sept. 11 terrorist attacks. Kohn and Yellen both oversaw new communication initiatives, with Kohn also acting as Bernanke’s key adviser during the financial crisis.

Brainard, 51, has international experience that could serve the Fed well on the both the policy and regulatory fronts. At the Treasury, she goaded Europe to stimulate demand and help boost global growth.

Banking Oversight

Her contacts could help U.S. regulators figure out how to manage the resolution of the international operations of large U.S. banks. The Fed will also require foreign banking companies “with significant U.S. presence” to form bank holding companies in the U.S.

The nominations, which are subject to confirmation by the Senate, would fill three openings on the seven-member Fed board. Current board member Sarah Bloom Raskin has been nominated by Obama to be deputy Treasury secretary. The Senate hasn’t confirmed Raskin, and she remains at the Fed.

Fischer, who holds both U.S. and Israeli citizenship and lives in New York, stepped down as governor of the Bank of Israel on June 30, midway through his second five-year term. He was credited with helping Israel weather the global economic crisis better than most developed countries.

Powell, 60, has been on the Fed since May 2012, filling an unexpired term that ends Jan. 31. He previously was an undersecretary of Treasury in the administration of George H.W. Bush.

Fed Guidance

As a professor of economics at Massachusetts Institute of Technology in Cambridge, Fischer taught Bernanke and European Central Bank chief Mario Draghi.

“The reach of the guy is really astonishing,” St. Louis Fed President James Bullard told reporters yesterday after a speech in Indianapolis. “I am looking forward to working with him.”

Fischer earned a reputation as a trailblazer as the first central banker to cut interest rates in 2008 at the start of the global crisis and the first to raise them the following year in response to signs of a financial recovery.

He also bought up foreign currency in unprecedented amounts to drive down the value of the shekel and boost exports, more than doubling reserves.

From 1988 to 1990, he was chief economist at the World Bank. After returning to teaching at MIT, Fischer joined the IMF as deputy to Managing Director Michel Camdessus in 1994, working to resolve financial crises in Mexico, Russia and Southeast Asia. He left the IMF in 2001 and joined Citigroup Inc. as a vice chairman.

Born in 1943 in Zambia, then Northern Rhodesia, Fischer was a member of Habonim, a Zionist youth group, along with Rhoda Keet, his future wife. In the early 1960s, he spent six months on a kibbutz in Israel, where he combined learning Hebrew with manual labor, picking and planting bananas.

In 2005, Fischer accepted Israel’s offer to head its central bank, and became an Israeli citizen, one of the job requirements.

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