The Federal Reserve is amid an unprecedented changing of the guard that could influence the dynamics of the debate over its controversial stimulus program.
Fed Chairman Ben S. Bernanke is the ostensible head of the nation’s central bank until his term expires at the end of next month. But the Fed’s second-in-command, Janet Yellen, will almost certainly be confirmed by the Senate this week as his successor. It is only the second time in the central bank’s history that its leaders have overlapped, and analysts say there could be a subtle shift in power when Fed officials gather in Washington this week.
“Her opinions started carrying more weight” once her nomination became apparent this summer, said Roberto Perli, head of global monetary policy research for Cornerstone Macro and a former Fed economist. “The voice of Yellen was heard more loudly than it was heard before.”
The chief question facing the Fed, which begins a two-day policy meeting Tuesday, is whether to begin scaling back the amount of money being pumped into the recovery. Officials are divided over the best course of action. A vocal minority has called for an end to the stimulus because of fears that the untested program could destabilize the financial system over time. Bernanke and Yellen have been stalwart supporters, arguing that pulling back too early risks undercutting the recovery.
But many analysts consider Yellen to be slightly more committed to the program than Bernanke. The Fed has tied the stimulus — which is carried out through bond purchases intended to lower long-term interest rates — to the health of the labor market. Yellen might set a higher bar for improvement.
Much of her academic career has been focused on the economic reasons underlying unemployment. In her public speeches, she has described the toll of joblessness in particularly human terms.
“The mandate of the Federal Reserve is to serve all the American people, and too many Americans still can’t find a job and worry how they will pay their bills and provide for their families,” Yellen said during her nomination.
Bernanke has made a point to state publicly his agreement with Yellen’s views. In a speech last month, he cited a line from her congressional testimony. Meanwhile, Yellen has publicly committed to continuing Bernanke’s style of open and transparent discussion. Some close to her say she will probably be more forceful in advocating her own arguments, but there is widespread agreement she will strive to reach consensus.
“We may have significant disagreements amongst us, but once we put our arguments on the table, we all like each other after the meeting,” Dallas Fed President Richard Fisher, who has called for reducing the stimulus, said in a recent interview. “It is, to me, the last bastion of civility.”
It is highly unusual for the outgoing and incoming leadership of the Fed to be working so closely together, particularly at such a critical time for central bank policy. That could also provide investors greater assurance that the Fed will adhere to its longer-term promise to keep interest rates low.
“There’s a very low chance of surprise,” said Randy Kroszner, a professor at the University of Chicago and former Fed governor. “Janet has been battle-tested.”
Choosing a Fed chairman is the responsibility of the president, and his pick often comes from outside the central bank. Yellen’s confirmation would mark the first time that a vice chairman moved up to the top job.
Only once before did a president choose an existing Fed official to become chairman. Paul A. Volcker was head of the New York Fed when he was nominated to succeed G. William Miller in 1979. Transcripts of the last Fed meeting before the changeover showed Volcker suggesting that the Fed be more aggressive in raising interest rates but deferring to Miller’s suggestion of a more moderate hike, to 10.5 percent.