It's Time for a Madam Chairman at the Federal Reserve

Sometime soon, Barack Obama will nominate a new Federal Reserve chairman. The two leading candidates for the most powerful economic job in the world are Janet Yellen and Larry Summers. Comparing the records of the two candidates, the scales appear to weigh so heavily towards Yellen that it should seemingly be declared ‘no contest’ in favour of the appointment of the first woman to hold the post.

Summers made his name in international economic affairs and more recently in fiscal matters rather than monetary issues. He is very much a Washington insider who held various posts in the Department of the Treasury in the Clinton administration, including Deputy Secretary (1995-99) and Secretary (1999-2001), and was chair of the National Economic Council in Barack Obama’s first term. If the Fed chair’s greatest challenge is to anticipate and react to surprises, supporters point out that he had a key role in preventing the spread of the East Asian financial crisis in 1997-98, when Time magazine named him one of ‘the committee to save the world’ (along with Fed chair Alan Greenspan and Treasury Secretary Robert Rubin). However, his enthusiasm for derivatives and repeal of the Glass-Steagall Act has to be weighed against the positive features of his 1990s CV. Nor is he known for the kind of consensus-building that the Fed chair must routinely engage in to develop support for his/her monetary preferences from the Board of Governors and the all-important Open Market Committee.

Yellen, by contrast, has an almost unrivalled CV in the monetary sphere. She was a Fed governor from 1995 to 1997 (for many, the golden era of the Greenspan-led central bank), was president and CEO of the regional Federal Reserve Bank of San Francisco from 2004 to 2010, and has served as vice-chair of the central bank itself since 2010. She is a distinguished economist, who has taught at Harvard, LSE, and Berkeley. Her track record as a forecaster, based on meticulous crunching of the numbers, is outstanding. In 2009 she was one of the few within the Federal Reserve System to predict that the pace of recovery would be disappointingly slow. Moreover, a Wall Street Journal survey put her ahead of the entire field of Fed forecasters for 2009-2012. Lastly, Yellen has a proven record as a consensus-builder during her time with the San Francisco Fed.

The strongest supporters for Yellen’s appointment are her fellow economists, who admire her academic record, her methodical approach to forecasting, and her distinguished record as a policymaker to date.

But Yellen has powerful critics, too. The Fed chair conventionally requires the confidence of the financial markets to be effective but Wall Street apparently has doubts about her ‘gravitas,’ a coded way of saying she considers combating unemployment to be equally as important a Fed responsibility as combating inflation. Reflecting this, Senator Richard Shelby of Alabama, the senior Republican on the Senate Banking Committee, voted against her confirmation as Fed Vice-Chair in 2010 on grounds of her so-called inflationary bias.

The Obama White House occupies a middle ground in the Yellen debate. In its assessment, there is little to choose substantively between her and Summers, but it is more comfortable with the latter’s style according to press reports. Treasury Secretary Tim Geithner, in particular, apparently considers Yellen too independent-minded and methodical. Her recent role at the Fed supports such an assessment -- but whether this is a bad thing is another matter. Unlike her predecessors as vice-chair, Don Kohn and Roger Ferguson, who acted as Bernanke’s close deputies and confidantes, she has operated more as an intellectual force in her own right within the central bank. The Obama team also has a soft spot for Summers as a former colleague.

Whatever the outcome of the nomination process, Yellen’s CV makes her supremely well qualified for the job of Fed chair. The fact she is a woman is irrelevant to the case in her favor but would be significant if she were to be appointed. It would be one more crack in the glass ceiling -- and a big one. Women had to wait sixty-five years since the Fed’s creation in 1913 to get a seat on the Board of Governors. The honor of being the first went to Jimmy Carter nominee, Nancy Teeters, in 1978. A feisty liberal, she became a leading voice of opposition on the Board of Governors and the Open Market Committee to the continuation of the draconian monetarist strategy pursued by Paul Volcker to throttle inflation at cost of very severe recession in 1981-82. [For anyone interested in reading about her role in that particular debate, see the present author’s article, ‘Monetary Metamorphosis: The Volcker Fed and Inflation,’ Journal of Policy History, 24 (Oct. 2012).]

Some thirty years later, it would do no harm to have another female unemployment hawk on the Fed Board of Governors -- and this time in the top seat.