Stanley Fischer’s Guidance for Janet Yellen

Dec. 16 (Bloomberg) -- Janet Yellen’s appointment as head of the Federal Reserve is likely to be sealed this week by a full vote of the Senate. With her fate all but certain, an as-yet-unannounced nomination is intriguing Fed-watchers: Stanley Fischer, until recently head of Israel’s central bank, as the Fed’s vice chairman.

Bloomberg News reported last week that Fischer has been offered the job and has accepted, though the White House hasn’t made an announcement. Apparently Yellen helped make the decision. This would be a surprising development -- in a good way, as Fischer is remarkably accomplished. But the chatter about a “dream team” may be premature: The idea is not without risk.

No disrespect to Yellen, whose credentials are outstanding, but Fischer is probably the most qualified person in the world to be Fed chairman. He’s an academic economist of the top rank and a renowned teacher of the discipline. (At Massachusetts Institute of Technology, he was thesis adviser to Ben Bernanke, the current Fed chairman; he also taught Larry Summers, until recently a strong candidate to replace Bernanke, and Mario Draghi, head of the European Central Bank.)

His policy experience is equally impressive: He had top jobs at the World Bank and the International Monetary Fund before heading to Wall Street for a short spell at Citigroup Inc. From there he moved to the Bank of Israel, where his record was conspicuously good. Israel weathered the global crash better than most. At the start of the financial crisis in 2008, Fischer was the first central-bank chief to cut interest rates -- and the first to raise them as the recovery got going.

It’s almost too much that Fischer is also universally liked. (How dare he?) Yet this trait could turn out to matter. Fischer’s stature will make him, in some ways, the Fed’s co-chairman. That’s the risk: As a rule, ships are better commanded by one captain than two. Public disagreement between Fischer and Yellen would unsettle financial markets more than the ordinary back and forth between the chairman and the other governors. That’s why a lot could depend on his -- and Yellen’s -- famed collegiality.

The very idea of this appointment attests to egos under much better control than the Washington norm. But the danger of a serious disagreement is real. Fischer and Yellen -- sorry, Yellen and Fischer -- differ on a vital point of monetary policy: so-called forward guidance, or how the Fed communicates its intentions to the financial markets.

On basic ideology, the two are in sync. They’re “New Keynesians” who support aggressive monetary stimulus when needed, including by unorthodox means such as quantitative easing. (Fischer has described QE as “dangerous” but “necessary.") They most likely agree on the need for caution in withdrawing stimulus in the U.S. while unemployment is still high and inflation low. On these crucial points, they are likely to be allies.

But they differ on forward guidance. Yellen has been deeply involved in developing the Fed’s increasingly complex announcements about the likely course of policy -- announcements that have occasionally thrown the markets into confusion. She and Bernanke have invested a lot of effort in this approach. Fischer is wary of such complexity. ‘‘You can’t expect the Fed to spell out what it’s going to do,” he said earlier this year. “We don’t know what we’ll be doing a year from now. It’s a mistake to try and get too precise.”

Fischer’s position makes sense. It’s unlikely he can bring the Fed around to his view, however -- not least because Yellen doesn’t agree. That disagreement could be a problem. The dream team, if it happens, needs to talk.

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