Obama's likely choices for Federal Reserve indicate a more activist role

By Neil Irwin
Washington Post Staff Writer
Saturday, March 13, 2010

President Obama's likely selections for three top positions at the Federal Reserve signal that he wants the central bank to focus on driving down unemployment and taking a more active role in protecting consumers.

The president's choices would bolster the faction of Fed officials -- including Chairman Ben S. Bernanke -- who are inclined to keep interest rates extremely low to try to bring down the jobless rate. A smaller group worries that doing so could lead to a spike in inflation.

The potential picks also suggest that the president wants the Fed to do more to restrict actions by banks that could endanger consumers, regardless of what consumer protection responsibilities the Fed ends up with in financial reform legislation now under consideration. The central bank failed to protect consumers from dangerous borrowing practices during the last economic boom, though it has taken more aggressive steps in the past three years.

The president is likely to appoint Janet Yellen, president of the Federal Reserve Bank of San Francisco, to be vice chairman of the Fed in Washington, administration officials said Friday. Yellen, a respected economist and Fed veteran, has been a leading advocate within the central bank for acting aggressively to strengthen the economy and has played down the risk of inflation in the current climate.

A leading candidate for a vacant Fed governor job is Sarah Bloom Raskin, the commissioner of financial regulation for Maryland. Raskin, who the sources said was still being vetted but was a likely pick, has won praise from consumer advocates for her steps to protect Maryland residents from potentially exploitative practices by banks and other financial companies.

MIT economist Peter Diamond, a candidate for a third vacant Fed governor position, is little known to Fed watchers. He is an expert in Social Security and pensions, areas over which the Fed has no authority, and has not published extensively on monetary policy. He could bring an approach to the economy that differs from that of the sometimes clubby group of monetary policy experts and Fed insiders.

Yellen, Raskin, and Diamond are "at the top of the president's list," White House press secretary Robert Gibbs said Friday, adding that others are under consideration.

Yellen, if appointed and confirmed by the Senate, would probably become a key Bernanke collaborator. Like the man she would replace as vice chairman, Donald L. Kohn (who plans to retire June 23), Yellen has deep knowledge of how the Fed works, accumulated during a four-year run as a governor in the 1990s and as president of the San Francisco Fed since 2004. She thus is likely to continue playing Kohn's unofficial role as emissary to officials throughout the sprawling Fed system.

In internal Fed debates during the past two years, Yellen has consistently pushed her Fed colleagues to move more aggressively to support the economy. Lately, she has been clear that she views the threat of continued high unemployment to be greater than that of higher inflation.

"Some people worry that sustained federal budget deficits and the huge increase in the Federal Reserve's lending and stimulus programs could eventually lead to high inflation," Yellen said in a Feb. 22 speech. "Others take the opposite view, arguing that economic slack and downward pressure on wages and prices are pushing inflation down. I would put myself squarely in the second camp."

That said, she is not a doctrinaire in her concern about employment over inflation. For example, Macroeconomic Advisers Vice Chairman Laurence Meyer recalled in a report Friday that when they were both Fed governors in the 1990s, he and Yellen approached Chairman Alan Greenspan in an unsuccessful effort to urge higher interest rates to head off the risk of inflation.

"She is the kind of person everyone respects for her intellectual rigor," said Peter Hooper, chief economist at Deutsche Bank Securities and a former Fed staffer. "She marshals quantitative and theoretical arguments to back her points. She listens and builds consensus. And she gets along extremely well with Bernanke."

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