Before she helped Ben S. Bernanke transform the Federal Reserve, before she was a top aide to Alan Greenspan, before she was a confidante to Timothy Geithner and a senior adviser to Lawrence Summers, Michelle Smith made a mistake that could have ended her career.
She told a group of reporters not to get lunch.
It was 1993, and the Clinton administration had decided to intervene in currency markets to bolster the value of the dollar vs. the Japanese yen. The element of surprise was critical. If investors knew what the United States was going to do, the purpose of the intervention could be defeated.
Smith was a few years out of Baylor University, a wide-eyed Dallas native who had come to work in the mailroom of Sen. Lloyd Bentsen (D-Tex.) before President Clinton named him Treasury secretary. At Treasury, she was a junior aide who handled public relations for the international affairs division and worked for a young, brilliant and brash Harvard professor named Larry Summers. “I was not pleased to get a person so inexperienced,” he recalled.
One day, Summers told Smith that she should prepare to distribute around noon a news release announcing the currency intervention to reporters in the pressroom at Treasury. This was a problem. There was an unwritten rule that between noon and 1:30 p.m., reporters could go to lunch and Treasury would not make major announcements.
So a little before noon, Smith sneaked down to the basement. Maybe nothing will happen, she told reporters, but you might want to stick around. Simple enough. She returned to her office — and a phone message from Summers asking her to return to his.
The walk from the second to the third floor of Treasury felt like the longest of her life. Summers and 20 other senior officials were waiting. “What did you do?” Summers asked.
Smith was flummoxed. “I just told them not to go to lunch,” she said. Summers pointed to his financial terminal: The markets were going crazy. That little hint from Smith led to news reports that the government was about to intervene. “I was bouncing off walls,” Summers recalled.
Smith apologized — and offered an idea: “Does anybody have anything that needs to be announced?”
In fact, Treasury needed to comment on the naming of a new president of the European Bank of Construction and Development. Smith asked for all available information about the official. She typed it out and took it down to the dozens upon dozens of reporters awaiting word of the currency action. Instead, she gave this bit of humdrum news. Soon, markets returned to normal, and no damage was done.
Later that afternoon, Treasury announced the currency intervention, and it had its intended effect. “I went from being furious to enormously admiring her cool under pressure and good judgment,” said Summers, who became Treasury secretary. “And for the next seven and a half years, we worked together virtually every day.”
In the two decades since, Smith has been a key behind-the-scenes player shaping how the public perceives the actions of Washington’s most important economic policymakers.
The role has been especially critical in recent years, as the Fed stretched its legal authorities to rescue the financial system and then embraced unorthodox measures to boost the economic recovery. The interventions drove a narrative that the Fed was operating to benefit the rich.
Smith, 44, who is the Fed’s chief of staff and runs its office of public affairs, was instrumental in pushing the naturally reserved Fed chairman, Bernanke, and the famously secretive central bank to become more open and to engage the media as never before. The goal was to convince the country — largely through the reassuring words of the soft-spoken Bernanke, a son of Dillon, S.C. — that the Fed was out to help the average American worker.
“She fought an uphill battle, which she ultimately won, that the Fed needs to let the public in,” said Kevin Warsh, a former Fed governor.
Most accounts of the economic ups and downs of the past 20 years have focused on the leading men. Smith’s story is about what it’s like for a woman to operate out of the public eye but in the upper echelons of American government while striving to balance work and family life. It’s a story that will reach another turning point Feb. 1, when Bernanke steps down and Janet L. Yellen, the Fed’s vice chairman, ascends to the central bank’s top job.
Smith “is one of the most powerful women no one has ever heard of,” said Jake Siewert, head of communications for Goldman Sachs and a former official in the Clinton and Obama administrations.
As a spokeswoman in Clinton’s Treasury Department, Smith was called on to master a wide array of complex topics in global finance. She brought to the job an interest in trade that took root during a journalism internship in Mexico, and she enlisted the help of Geithner, a rising star who would tutor her in global economics.
Smith, in turn, was able to help Geithner on his climb through the ranks of Treasury, offering him blunt reality checks when he, for instance, thought a reporter didn’t capture all the nuances of a story. “She’s very good at doing the necessary thing of providing a little bit of reality about how this is likely to be perceived and the overwhelming challenges of explaining it,” Geithner said. “I remember telling her about a story I was centrally involved in that ‘it’s not true. It’s not right on the key points.’ She looked at me and said, ‘There’s no way you’re going to get closer to the truth.’”
Smith traveled the world with Summers and his chief of staff, Sheryl Sandberg, who would go on to become the No. 2 at Facebook, author of the book “Lean In” and one of the most influential female executives of the country. But in those days, Sandberg looked to Smith for inspiration about raising a family in the intense world of high finance and politics.
“Michelle was my first friend and peer who I was working with who had a child,” Sandberg said, recalling the birth of Smith and husband Blake’s daughter in 1997. “Michelle took maternity leave and came back. She laid down that example for me and others.”
At Treasury, Smith helped shape the nation’s perception of Clinton’s famous economic team, led by Robert Rubin. After the Asian financial crisis, she was a force behind the famous Time magazine article “The Committee to Save the World” — a concept that was revived a decade later during the global financial crisis.
At the end of the Clinton administration, Smith joined Greenspan, the Fed chairman, who was viewed as a “maestro” overseeing a remarkable period of economic prosperity. There were some awkward moments, politically and personally: Smith was a true-blue Democrat, and Greenspan had endorsed the deep tax cuts proposed by President George W. Bush early in his administration.
What’s more, Greenspan was notorious for working at home in the bath, a habit politely tolerated by his staff. But when Greenspan presented Smith with papers that clearly had been in the tub, she bluntly told him that wouldn’t work.
But much else did. Together, Greenspan and Smith refined a style of media outreach that has survived, even while much else has changed about the Fed. For most of its history, the Fed said almost nothing about what it was doing. Reporters and investors were left to divine policy from market patterns.
Then, in 1994, the Fed began announcing policy actions at the end of meetings. But the central bank still struggled with communications. If the Fed chairman or another senior official merely suggested that the Fed was contemplating a move, markets could react wildly. “There’s a very subtle issue of trying to deal with the way human beings react to contingency statements,” Greenspan said.
As a result, Greenspan was famous for talking in circles. Privately, though, he was more direct with reporters, hoping to influence market expectations so that Fed policy pronouncements wouldn’t cause massive dislocations. Greenspan was almost never quoted on the record, but a few economics reporters had access to him. He didn’t tell them exactly what he planned to do, but the reporters combined what they could learn from him and from other Fed officials to make educated inferences about the direction of Fed policy — a pattern that continues today.
“We were trying to make the issue of communications or changes in policy as forecastable as possible by the market without essentially telling them what we were trying to do,” Greenspan said.
When Greenspan prepared to step down in 2006, he asked Smith to go with him to start a consulting firm. She reluctantly agreed and told the new chairman, Bernanke, that she would go. The Fed announced her resignation on a Friday.
Over that weekend in 2006, Smith was in tears, regretting the decision. She finally told Greenspan. “I hoped very much she’d become a partner of mine in the business, and despite the potential large rewards, she decided the Fed needed her more than I did,” Greenspan said.
Meeting with Bernanke, Smith made clear that she wanted to preserve a healthy work-life balance. She proposed a plan to leave the office by 4:30 or 5 p.m. each day. “During that relatively placid time,” she recalled in a speech in Austin in 2010, “I went to my new boss and said that although nothing was wrong with my family, I just needed to see them more.” But she added, “I never needed the talking points: He told me about the ways he juggled work and family when he was a college professor and his children were younger.”
A professor of economics, Bernanke was easily made nervous in public. It didn’t help that on at least one occasion, he had moved markets with an unintentional statement. As a matter of policy, he thought the Fed should be more transparent about its intentions and speak to the public in clearer language, but he chafed at the idea that the Fed chairman was seen as synonymous with the institution. He repeatedly spoke of “depersonalizing the Fed.”
Then the financial crisis hit, and Smith’s pursuit of a healthy work-life balance went out the window — and so did Bernanke’s plans. She made it her job to personalize the Fed by making Bernanke the face of the government’s response.
To stem the panic, the Fed committed hundreds of billions of dollars to save big banks and more than a trillion dollars to keep the financial markets functioning. During the fast-unfolding crisis, Smith helped coordinate the government’s response, drawing on her personal connections with key people like Geithner, who became president of the New York Federal Reserve Bank and then President Obama’s Treasury secretary; and Summers, who returned to Washington as Obama’s chief economic adviser.
“When I showed up in ’09, she was really at the center of everything. She wasn’t just the person people called to find out what her boss thinks. She is the person who you call to get something done or advice,” said Siewert, the Goldman Sachs executive, who at the time was working with Geithner. “There was a need and demand for a coordinated reaction, coordination between the White House and Treasury and the Fed. Michelle was the natural centerpoint for that.”
More than anything, her job was to protect the Fed’s reputation. The central bank was being criticized across the political spectrum, accused of helping to save the financial system but doing little for the average American. The criticism was a threat to the Fed, which deeply values its independence and credibility.
“It became clear after the crisis broke out that the Fed was under attack for favoring Wall Street instead of Main Street,” said Donald Kohn, the vice chairman at the time. “She was particularly helpful in thinking about how the chairman could be used more effectively to counter this argument.”
Smith turned to prime time. No Fed chairman had appeared on “60 Minutes” in two decades. Early in 2008, a correspondent had called about interviewing Bernanke. She laughed at the proposal.
But when she met with Bernanke in late 2008 to discuss the idea, she began by saying, “Don’t say no.”
Bernanke, Warsh, Kohn and Smith often held what they referred to as “strategery” sessions — a little Bush-era humor — during the crisis. It was in those moments that Smith would push for greater openness at the Fed. She repeatedly brought up the “60 Minutes” option, and Bernanke, in keeping with the general caution of the Fed, at first was skeptical. Finally, as he softened to the idea, he asked where the interview would be if it were to happen.
“Obviously, we’d do it here and in the boardroom,” Smith replied. “But then we should also go back to your home town, because that’s the town we’re all from and so that people can understand you’re talking about Main Street.”
Smith later recounted the strategy to the Austin audience. “We realized that the Fed’s normal ways of communicating — through speeches, congressional testimony and press releases were not sufficient for a crisis of the magnitude that the nation now faced,” Smith said. “His willingness to open up on a more personal level helped people to identify with him and increased their trust in Bernanke as a leader and in the Fed as an institution.”
The “60 Minutes” episode was viewed by 19 million people — and was a watershed event in the Fed’s relationship with the media. “It isn’t unique for politicians, but the Fed chairman has traditionally thought of himself as being kind of something like the pope or the chief justice of the Supreme Court — somebody who would be judged on his actions but should never feel he needed to explain or seek public approval,” said David Wessel, a longtime reporter for the Wall Street Journal, who now runs a Brookings Institution monetary and fiscal policy center.
After “60 Minutes” came what looked like an all-out campaign by the Fed to win the public’s — and Congress’s — support. Bernanke took questions at the National Press Club. He appeared on the “PBS NewsHour.” He toured businesses and met with military veterans and students. He even gave a series of lectures for undergraduates.
The culmination of the effort was something the Fed had never done before: Bernanke holding quarterly news conferences after the central bank’s policy meetings.
“Given the crisis, there was a greater need than had historically been the case for me and the Fed to get out and explain to the broader public what we’re doing,” Bernanke said. “At the same time, on a principled basis, central banks ought to be transparent. Michelle has very much been my partner in that.”
The results have been mixed. By and large, investors, Congress and the financial media have given Bernanke high marks, and he essentially has preserved the Fed’s authority despite many arguments for curtailing its powers since the crisis. On the other hand, only a slightly larger portion of the public gives him a favorable rating than an unfavorable rating, and many Americans, when surveyed, report not knowing who he is.
For much of last year, it seemed that Smith might end her career in public service as she began it: as an adviser to Larry Summers. When it became clear that Bernanke was going to step down, Obama looked to Summers as a possible successor. By many accounts, he was intent on nominating his former economic adviser as Fed chairman after passing him over for the job in 2009.
But then an unexpectedly public and determined campaign to defeat Summers emerged from the left wing of the Democratic Party. And friends of Yellen, the vice chairman, complained that she wasn’t getting a fair shake from the White House. After all, she had perhaps the deepest knowledge of the central bank of any prospective Fed chairman in history. Her nomination would also shatter a glass ceiling.
Smith’s friends say the situation last summer was painful for her. Her job was to represent Yellen as vice chairman, but she also had a deep friendship with Summers. Of course, she had no power to affect the decision and no role to play in it.
“It’s hard to think of someone who might be in the running to be a Federal Reserve chairman that she wouldn’t know very well,” said a person who knows Smith well but who spoke on condition of anonymity. “But it was particularly acute because she had worked so closely with Larry.”
With a new chairman and two decades of financial policymaking behind her, many expected Smith, the mother of a high school student, Madeleine, and a middle-schooler, Henry, to decamp from the Fed once and for all. She has had opportunities.
“Over my years in the private sector, I’ve tried to recruit her to join me,” Facebook’s Sandberg said. “She’s never done it. She remains a public servant.”
Smith plans to continue in her current role. She grew closer to Yellen during preparations for the nomination process and the leadership shuffle at the Fed.
Yellen appears to be picking up where Bernanke left off and not where he started — not intending, as he once did, to reduce the Fed chairman’s profile. On the contrary, she has talked with Smith about speeches and venues that could help build up her profile beginning in April.
“I do think people will be focused on who I am, what my values are. And I’m going to want to communicate the message that we’re devoted to improving the lives of households in the United States and doing things that benefit Main Street,” Yellen said in an interview. “Michelle will be very experienced and insightful about what kinds of venues are useful and appropriate to help me get that message across.”