Yellen vs. Kohn is the new Summers vs. Yellen

September 17, 2013

Kohn on the left, Yellen on the right. But who will be the next chairman of the Fed?

All summer, the hot debate in economic policy circles was over whether Larry Summers or Janet Yellen would be nominated to be the next chairman of the Federal Reserve. That all ended with Summers's withdrawal from consideration on Sunday. It appears Yellen is now the front-runner for the job, and the White House has signaled it is not reopening the search to consider other options (and former Treasury secretary Tim Geithner has made it amply known that he is not interested).

Which means that President Obama's decision, likely to be made soon, will come down to Yellen versus the man who had been mentioned as the No. 3 possibility. Donald L. Kohn.

So, if it's now Yellen vs. Kohn, how does each stack up on the key things a president might look for in a Federal Reserve leader? Here's a guide.

Experience. Both Yellen and Kohn would take office as arguably the most qualified Fed chief in history. Each has served as the No. 2 official of the institution -- Yellen from 2010 to the present, Kohn from 2006 to 2010. Each had extensive experience at the institution before that -- Yellen as a governor and as president of the San Francisco Fed for a combined nine years, Kohn as a governor for four years and as a staffer for more than three decades before that, including a long run as a senior adviser to Alan Greenspan.

Monetary policy. Kohn has been cautious in his public comments about monetary policy since leaving office in 2010, so it is not fully clear how he might lead the course of interest rate policy if he became chairman. Yellen has given detailed speeches laying out a path that includes hiking interest rate beginning at 2015 at the earliest. Going back to 2010, when Kohn was still vice chairman at the central bank and Yellen was in San Francisco, she tended to be a more enthusiastic proponent of unconventional steps to ease monetary policy  to bring down unemployment. Kohn was more in the center of the Fed's policy-making committee as a close counselor to Chairman Ben Bernanke, as Yellen helped push the committee in a dovish direction, toward its expansive program of quantitative easing.

Crisis management. Kohn has more experience dealing with Fed policy in the crucible of a crisis, including as part of Bernanke's inner circle in 2007-2008 and as a close adviser of Greenspan during the emerging markets crises of the 1990s and in the aftermath of the Sept. 11, 2001, terrorist attacks. Yellen led the San Francisco Fed during the 2008 financial crisis, however, and was ahead of the curve in recognizing dangers that the housing and lending bubble of the mid-2000s were creating. Former colleagues in San Francisco have praised her as being cool under pressure and for immersing herself in banking regulation issues during 2008. But the biggest crisis response decisions were being made in Washington and New York.

Bank regulation. It's tricky to parse how Yellen and Kohn might differ in their role regulating banks and other financial institutions. Here is a recent Yellen speech articulating her views, arguing (among other things) that higher capital requirements for global banks have made the financial system more sound, but that more work is needed to eliminate risks in the "shadow banking system" of markets that act like banks but are unregulated. Kohn seems to be on the same page. Here are some comments he made Monday that broadly align with Yellen's. He has served on the Bank of England's financial policy committee, a part-time role in which he has helped reshape the British regulatory system. Here are some of his comments on how to do so.

Politics. Inevitably, the Fed chairman must navigate the shoals of politics, maintaining relationships with the White House and Congress. Both Yellen and Kohn have worked at high levels of U.S. government for many years, though neither has a particularly close relationship with President Obama or current senior Obama administration officials. In terms of Congress, Yellen has shied away from representing the Fed before lawmakers, and has not testified before Congress in her three years as vice chairwoman. Kohn testified six times in his last three years in the same job.

Yellen does have executive branch experience, which Kohn lacks, having served in the Clinton White House as chairman of the Council of Economic Advisers. Kohn, meanwhile, would bring a tinge of bipartisanship; he was appointed Fed vice chairman by George W. Bush, though Kohn himself says he is apolitical.

Management. Both would bring experience running the complex, sprawling Federal Reserve system: Yellen as president of the San Francisco Fed, Kohn as director of the powerful monetary affairs division, both of them as vice chair. Both are said to be demanding bosses, with high expectations of their subordinates, though neither has the kind of acrimonious history of clashing with colleagues that damaged Summers's chances at the job.

Communication. The Fed chief must speak to all sorts of audiences, from news conferences to congressional hearings to speeches to business groups. Both Yellen and Kohn are experienced at this part of the job. Kohn has shown more inclination to do the off-the-cuff sort of presentations, while Yellen tends to be more carefully scripted.

Add that all up, and what is the decision the president faces? Yellen and Kohn are close to equal in their experience and basic policy outlook. Kohn may be a little more hawkish on monetary policy and prone to worry about asset bubbles, and he has more first-hand crisis management experience. Yellen is probably a bit more focused on getting unemployment down as rapidly as possible.

The president has a choice between two very qualified, experienced central bankers for the job, with the differences between them more subtle variations in style and temperament than any vast chasm in monetary policy views. Against that backdrop, if he passes over Yellen, who would be the first woman in the job and has been endorsed by Wall Street economists and many in Congress, he'll face tough questions on why.

 For more, read this profile of Yellen, or these eight things to know about Kohn.

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