Vice Chair's Departure Won't Shake the Fed
Stanley Fischer's departure from the Federal Reserve is an opportunity to salute his career, though not one for deep concern about the institution for which he was second in command.
If there's a real surprise in Fischer's resignation letter, it's probably in the timing. His four-year term as vice chair was to end next year, and few observers considered him a contender for re-appointment. Almost as few thought he would want to stay. Besides, vice chairs tend not to be re-appointed, unlike chairs, who in the modern era have usually been given at least a second shot. Think Paul Volcker, Alan Greenspan and Ben S. Bernanke.
Fischer's departure probably won't affect the short-to-medium trajectory of monetary policy. The Fed has pretty clearly flagged that this month's meeting of the Federal Open Market Committee will be devoted to the question of balance-sheet reduction. Another prospective increase in interest rates won't be on the table, realistically, until December. (Regulation may be a different story, but that isn't the subject of this piece.)
By that point, at least one of President Donald Trump's Fed selections ought to be confirmed and in place. Randy Quarles is a nominee for the role of vice chair of supervision -- different from the role Fischer is vacating. He served in the Treasury department under President George W. Bush. Marvin Goodfriend, a former senior official at the Richmond Fed, has been reported to be under consideration for a vacant governor seat. Both men have perspectives, but aren't bomb-throwing revolutionaries.
Another reason not to sweat the post-Fischer Fed too much is the structure that has been in place around Fed policy. As I wrote last month in the context of the Fed chair sweepstakes, the central bank is constrained by a framework officials themselves have put in place: forecasts, press conferences and the famous dots. Sure, personnel changes can bring changes in those things, but don't underestimate the power of process or of the economic environment in shaping them.
Make no mistake, Trump does have the opportunity to reshape the Federal Reserve. Right now, there are three vacancies at the seven-member Board of Governors. Fischer makes it four.
It's unclear whether Trump will give Yellen the nod or not, though he seems to have warmed to her compared with his remarks during the campaign. Lael Brainard, a very influential figure at the Fed, made a donation to Hillary Clinton's campaign that raised hackles among Republicans in Congress. Some wonder how long she will stick around.
Here again, change may be more incremental than dramatic, at least initially. Aside from Quarles's establishment credentials, the most likely contender to succeed Janet Yellen is said to be Trump aide Gary Cohn, a former president of Goldman Sachs Group Inc. It's a fair bet he won't try to dismantle the international financial and monetary system. Besides, the Fed is at pains to say and show that it is data-driven.
And don't forget Fed staff, especially those in the powerful division of monetary affairs in Washington, and at the New York Fed. Their influence can be significant. And that's before you even get to the enormous contribution made by William Dudley, president of the New York Fed. It's not for nothing the head of the New York Fed is sort of a first among equals.
To say that his departure will have modest effect is not to diminish Fischer's significance. Few top Fed officials came to the job with a resume the equal of his. (Just a sample: aside from being governor of the Bank of Israel, he taught Bernanke and European Central Bank President Mario Draghi.) When he leaves the Fed's headquarters on Constitution Avenue for the last time, an era will have ended.
But it doesn't spell the immediate end of the institution or its current monetary policy trajectory.
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