Off to the Races: The Contest to Lead the Fed

fedconstructAfter Congress revamped the Federal Reserve Act in 1935, construction began on a new home for the Fed—liberating the Fed from sharing quarters with Treasury.  This 1937 photo of the Eccles Buiding under construction reminds us that the original 1914 Fed was not set in stone and that it continued to evolve over its history.  (Squint, and you’ll see the crane dropping the Fed’s glass ceiling into place.)

This summer’s contest over the future leadership of the Fed signals the continuing development of the Fed.  As defenders of Larry Summers and Janet Yellen wage public and private campaigns for their candidates, it’s worth stepping back to consider the broader import of this battle over the leadership of the Fed.

First, let’s be clear: previous presidents have deliberated over short lists of potential Fed chairs.  Reagan (ironically) felt that Paul Volcker the Democrat was too hawkish, so he needed to appoint the Republican Greenspan.  George W. Bush selected Ben Bernanke over two competitors who had stronger political ties to the president.  But the public contest between advocates of Summers and Yellen is unprecedented.  The Atlantic’s Matt O’Brien captures it best:Screen Shot 2013-07-29 at 10.57.50 PMStill, we shouldn’t be surprised about the politicized selection of a new Fed chair.  Congress’s attention to the Fed tends to be counter-cyclical, rising and falling with the state of the economy.  When the Senate first confirmed Bernanke as chair in 2006—with inflation and unemployment hovering at four percent—the vote was unanimous and unrecorded.  Four years later, the Fed’s unconventional boldness in monetary policy and its forays into credit allocation generated a record level of Senate opposition to confirming Bernanke for a second term.  Today, with both inflation and employment below the Fed’s targets but with pressures mounting for the Fed to unwind its unconventional policies, it matters who gets the nod as chair. Given the centrality of the Fed to the state of the economy (and the fiscal headwinds caused by recurring Congressional stalemate), the Fed has never been more politically central (and thus less independent) than it is today. No wonder the Summers camp is trying to make his nomination a fait accompli; no surprise the Yellen camp has reacted by demonstrating that her macroeconomic chops and central bank experience are second to none.

Second, the division of opinion between Summers and Yellen appears to rest largely within the Democratic party.  Republicans are generally watching from the sidelines.  Interestingly, only six Republican senators remain from the Senate that in 1994 confirmed Yellen by a vote of 94-6 to a term on the Fed’s Board of Governors.  Five GOP, including Mitch McConnell and John McCain, voted to confirm—as did Richard Shelby, then still a Democrat.  The remaining Republican, Chuck Grassley, voted against confirming Yellen.

In many ways, the debate between Yellen and Summers captures an historic Democratic divide between its Wall Street and more liberal, Main Street wings.  Summers’ defenders emphasize his personal relationship with Obama (including tennis and golf) and his economic brilliance, but also his experience in the world of finance (implying an inner hawk).  The Yellen camp points to her distinguished career as a central banker and her leadership within the Fed.  Senate liberals also clearly prefer Yellen for her dovish macroeconomic stance in a period they believe still demands a dovish central bank.  (Breaking the Fed’s glass ceiling? Icing on the cake for Yellen’s boosters.)  The divide between the Wall Street and Main Street wings of the Democratic party is an old one for the party, recurring most recently in contests over Dodd-Frank and in reactions to Bernanke’s leadership of the Fed.  (Senators on the far left were clearly more suspicious than their Democratic colleagues of the Fed’s largesse in bailing out failing financial institutions at the height of the financial crisis.) It is tempting to portray the horse race as a contest of personalities (which, of course, it is), but the contest also taps an enduring Democratic divide unlikely to be patched over the course of a campaign to lead the Fed.

8 Responses to Off to the Races: The Contest to Lead the Fed

  1. foosion July 30, 2013 at 8:28 am #

    The Wall St – Main St divide is a bit odd in this context, given the recent reports that Wall St economists overwhelmingly favor Yellen.

    • Sarah Binder July 30, 2013 at 9:31 am #

      Fair enough! Point well taken. Tables are a bit turned here. “Wall Street” in this case (economists, traders, strategists) seeks predictability in monetary policy; the industry gets that with a higher degree of certainty from Yellen as opposed to Summers. But keep in mind that Senate liberals have several reasons to support Yellen over Summers (one of which is surely their disagreement with the policy priorities of the financial industry– from which Summers has a hard time distancing himself).

      • foosion July 30, 2013 at 10:24 am #

        I’m somewhat surprised at the lack of support for Summers. I’d have thought his deregulatory record would have led to more Wall St support.

        The opposition to Yellen reached the parody stage with the WSJ editorial opposing her on the grounds that she’s a girl. This was even sillier in light of the WSJ simultaneously running a story showing she has been the best economist (or at least the best forecaster) on the Fed Board.

        One major failing of Obama and the Democrats has been consistently ignoring monetary policy, while the Republicans have consistently pushed for tight money when a Dem is in office (and easy when an R is president). Nice to see the Senate Dems finally noticing monetary policy.

  2. RobC July 30, 2013 at 10:13 am #

    It isn’t the first time there’s been a debate within the Democratic Party about Wall Street versus Main Street and, not incidentally, how much inflation is desirable.

  3. Moescher July 30, 2013 at 5:11 pm #

    Benjamin Strong was the very first head of the Federal Reserve System in 1913. He had been chief of J. P. Morgan’s Bankers Trust Company.

    Strong was also one of the original seven “Money Trust” {Big Banks} conspirators who designed the Federal Reserve System banking cartel, at a highly secret meeting at the “Jekyll Island Club” on the Georgia coast, in 1910. Those seven represented only the big-banking interests. A few men sat around the table and created the Federal Reserve System for their narrow banking interests.

    If it had been exposed publicly that those 7 men had written a Federal banking bill, that bill would never have passed Congress– because the legislative intent then was to break the grip of the “Money Trust” on America … yet the bill was cleverly written & marketed by that very money-trust itself, to do exactly the opposite. The Federal reserve system was created by the Morgans, the Rockefellers, Kuhn, Loeb & Company, the Rothschilds and the Warburgs.

    A century later, few know or care about the appalling origin and structure of the Federal Reserve System; interest seems limited to whether a male or female will take charge of it next.

  4. Honeyboy Wilson July 31, 2013 at 11:46 am #

    “Senators on the far left …”

    Just out of curiosity, name a few.

    • Sarah August 2, 2013 at 12:36 pm #

      Good question. Here are two ways of identifying far left Democrats who I characterized as being “more suspicious” of some of the Fed’s unconventional policies in the wake of the financial crisis. First, c0-sponsors of Bernie Sanders’ audit the Fed bill in 2009, and second, Democrats voting against Bernanke. Here are the more liberal of the Democratic senators who fall into one or both of these groups:

      Liberal, Democratic co-sponsors of Bernie Sanders’s (D-VT) audit the Fed bill in 2009 included: Barbara Boxer, Ben Cardin, Tom Harkin, Pat Leahy, and Ron Wyden.

      Liberal Democrats voting against confirmation of Bernanke to a second term included Barbara Boxer, Byron Dorgan, Bernie Sanders, Tom Harkin, and Jeff Merkley. Kind of an honor roll of liberal Democrats!

  5. Donal Adams August 3, 2013 at 3:41 am #

    Bernie Sanders is not a Democrat. He caucuses with the Democratic Party and is counted as a Democrat for the purposes of committee assignments, but because he does not belong to a formal political party, he appears as an independent on the Vermont ballot.