Should we worry about who the next chair of the U.S. Federal Reserve is? If the U.S. economy is on the mend, what difference does it make?
We learned this weekend that Larry Summers has withdrawn his name from the short list of candidates to replace Ben Bernanke as chair of the U.S. Federal Reserve. In a letter to President Barak Obama, Summers acknowledged that “any possible confirmation process for me would be acrimonious and would not serve the interest of the Federal Reserve, the Administration or, ultimately, the interests of the nation’s ongoing economic recovery.”
The move is surprising, but not completely. Washington has been debating (pre-debating, really) Summers’ candidacy versus the possible nomination of current Fed vice-chair Janet Yellen for a couple of months now. While Yellen enjoys broad support — from all reports she’s an extraordinary economist who would make a fine chair — Summers was thought to be Obama’s favourite for the post. After serving President Bill Clinton as Secretary of the Treasury during the last year and a half of his administration, Summers helped launch President Obama’s first term as director of his National Economic Council.
Some commentators predicted that a Summers nomination would trigger a difficult and perhaps even unsuccessful Senate approval process. That had the potential to shake investors’ confidence in the burgeoning U.S. economic recovery. Clearly there was something to these forecasts, given the language in Summers’ letter.
Certainly this is a huge moment to be undertaking a change in leadership. Bernanke has signaled to markets that he will begin to unwind the Fed’s massive quantitative easing program soon (we may even hear something this week). And a strong argument can be made that the U.S. stimulus program that followed the financial crisis is so large and so unprecedented that no-one can safely predict what will happen as this so-called tapering process gets under way. In this sense, President Obama’s decision matters a great deal.
But now that Summers is out of the mix, I don’t think there’s any reason to worry about who steps into Bernanke’s role early next year. Again, Yellen would be a superb nominee and would bring years of Fed experience to the role. She has to be seen as the leading candidate to the extent that investors and policy makers around the world want a smooth transition.
There are other possibilities of course, including another former Secretary of the Treasury, Tim Geithner. But the key point is this: It’s virtually impossible to imagine a scenario where President Obama selects a candidate who (a) isn’t going to move in lockstep with Bernanke’s plan to unwind quantitative easing; and (b) doesn’t enjoy broad support in the Senate.
The Summers distraction is gone. It won’t be replaced by another.
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