Federal Reserve

The Next Fed Chair Won't Really Control the Fed

The institution is constrained by far more voices than it used to be, from inside and out.

If Gary Cohn takes over, he won't be the next imperial Alan Greenspan.

Photographer: Andrew Harrer/Bloomberg

Economists seem increasingly confident that Gary Cohn, the investment banker and White House adviser, will succeed Janet Yellen as head of the Federal Reserve when her term ends in February.

Whether Cohn or someone else gets the nod, the horse race masks some of the broader dynamics at work the past decade that have fundamentally altered the Fed, mostly for the better, and continue to shape it in ways once thought inconceivable.

The central bank, rightly, gets far more scrutiny from Congress, the media and the public than ever before. That scrutiny stems mainly from the searing 2008-2009 recession and the dramatic steps the Fed took to shore up the financial system and the broader economy. Some public reckoning was bound to result and, properly, seems here to stay.

The new chair will also inherit a Federal Open Market Committee that's become far more democratic and whose members, especially the presidents of the dozen district Fed banks, zealously guard their role in setting monetary policy. 

They aren't beyond speaking publicly -- and getting attention -- on issues ranging from economic inequality to public education and drug testing in the workplace. While some of this freelancing annoys officials at headquarters in Washington, it does mean important arguments get aired sooner and more vocally. Kudos to Chicago Fed President Charles Evans for long questioning whether inflation is behaving as it should, while James Bullard of St. Louis months ago advocated pausing on rate increases.

These voices all need to be heard, respected and managed. Sometimes they are right. Their distance from the chair and contacts in their local communities can give them perspective missing in D.C.

Perhaps more voices should be involved in choosing the Fed leader. At the moment this position is filled by presidential nomination and Senate confirmation. 

In an ideal world, more voices would contribute to that choice, including from outside the U.S. After all, economic conditions in the rest of the world shape what decisions are made in the U.S.

The Fed is not only America's single most powerful economic institution. It is far and away the planet's most influential central bank. (Just spend a week in Asia during a meeting of the Federal Open Market Committee and see how much time and energy the press devotes to deconstructing each sentence in the FOMC statement. The People's Bank of China is barely mentioned.)

But let's stick to the Senate, which by law must consider and vote on the president's nominee. The confirmation votes used to be more of an opportunity for deification than debate.

When President George W. Bush selected Ben S. Bernanke to succeed Alan Greenspan, he was confirmed in 2006 on a voice vote. Four years later, when President Barack Obama re-nominated Bernanke, it was a very different tale. He was confirmed 70-30. Thirty nays was the most since the Senate began directly confirming chairs in 1978. And for days, it hung in the balance. Only a market swoon at the prospect of the vote's failure brought a majority around.

Four years later, the fight occurred even before Obama announced Bernanke's replacement. White House aides made it known that Larry Summers was a strong contender. That led to a congressional blow-up, mostly over deregulation of the banking industry in the late 1990s when Summers was deputy and then subsequently secretary of the Treasury. In the end, Summers withdrew from consideration and Obama went with Yellen. The Senate confirmed her 56-26. 

So the margins are getting tighter and the debate fiercer. Given the stakes, that's appropriate.

Regardless of who takes over for Yellen, and regardless of whether that person has a strong mandate from the Senate, it's hard to imagine those district bank presidents being silenced by a new chair. Too many dissents can create a public headache.

Decisions by the rate-setting FOMC are made by vote, recorded and published at the end of each two-day meeting, of which there are about eight a year. At least one dissent is seen as pretty run-of-the-mill these days, and two isn't entirely uncommon. Three dissents in a single meeting starts to attract a lot of attention, most of it unwelcome. 

So chairs need to be mindful of where the center of gravity in the committee and navigate around and through it. And those district presidents, who are almost always the dissenters, now typically issue their own competing statements and aren't shy about getting on the telephone with journalists and making speeches on the issues.

Another institutional constraint is the big increase in information the Fed makes available. Once a quarter, in conjunction with an FOMC meeting, the Fed releases economic forecasts, anonymous estimates from each voter of when rates will rise or fall (the famous dots) and has a press conference. 

This isn't to say the Fed's transparency is perfect. Far from it. But it has come a long way. All those numbers and projections act as another constraining factor on the person leading the organization, because the chair will be asked about them and pressed to justify them frequently. 

Once upon a time, the idea of a press conference by the chair would have been treated as heresy. The Fed came late to that: The Bank of England, the European Central Bank and the Bank of Japan all did it first. But it now exists. Try taking it away and brace for the howl of protests that would rightly follow. 

So whoever President Donald Trump names faces a very different world from many of their predecessors. They aren't, and can't be, a dictator. Given the stakes, that's a great relief.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Daniel Moss at dmoss@bloomberg.net

    To contact the editor responsible for this story:
    Philip Gray at philipgray@bloomberg.net

    Before it's here, it's on the Bloomberg Terminal.