As President Obama selects a new chairperson for the Federal Reserve, he will also be deciding whether he wishes to maintain the Bernanke approach to managing the nations’ central bank or to seek a new direction.
Within FedWorld — those who work within the Federal Reserve system both in Washington and in a dozen reserve banks around the country — there is a sense of wariness at the possibility that past Treasury secretary Larry Summers could be their next boss, current and former officials said. The other leading candidate, Fed vice chairwoman Janet Yellen, can also be a demanding taskmaster, they said, though as a long veteran of the institution they view her as more likely to continue Bernanke’s collegial manner of dealing with the sprawling, 18,000-employee system.
Fed officials themselves don’t get a say, of course; the decision of who should succeed Ben Bernanke when his term expires in January is up to the whims of President Obama and the Senate, which must confirm the nominee. But change could be afoot no matter what the president’s decision.
Bernanke’s chairmanship has been marked by an unusual degree of patient consensus-building within the organization. Bernanke persuades, builds coalitions, works angles and tries to find a path to policy that almost everyone can agree upon. Officials across the 12 banks in the Federal Reserve system feel that they are heard and respected, even when the policy ends up not being their exact preference.
"The chair of any committee can respond to comments that challenge his view in ways that essentially inform the committee that the issue isn't worth discussing,” Richmond Fed president Jeffrey Lacker told me in 2009. “This chairman doesn't do that. He takes other views seriously." (For more on Bernanke’s leadership style, read the whole piece. Or maybe a book).
This management style has costs and benefits. The benefits: When the Fed does come to a decision, such as the September 2012 launch of a new round of quantitative easing, the policy has deep support and markets can be confident that it will be executed as planned. The costs: It can take some time to do all that consensus-building, which has arguably made the Fed slow on the draw with some of its policies. Also, with the spirit of open debate, Fed officials feel comfortable spouting off even when they don’t agree with the party line, creating a cacophony that often confuses markets.
A Summers appointment would almost surely mean a step in the opposite direction; Summers and Bernanke share a formidable intellect and reputation as academic economists, but they are almost diametric opposites in their leadership style.
Current and former Fed officials said that they see Summers as a Fed chair who would, in important ways, represent a shift back to the balance of power in the Alan Greenspan era, with decisions concentrated among the chairman and a few aides and the rest of the Fed policymakers expected to vote as they are told and go with the flow.
They particularly fear that Summers would be dismissive of the kind of sensibility that reserve bank presidents bring to the table eight times a year at the Federal Open Market Committee, the Fed’s monetary policy arm. They, too, are economists, but they also spend much of their time speaking with business executives in their Fed districts, going to Chamber of Commerce-type events, and gathering anecdotal information about what is happening on the ground around the country. Summers is more drawn to theoretical analysis.
Summers also has a track record of being supremely confident in his own intellect, to the point of being dismissive of those with whom he clashes. Summers's impolitic remarks about women in the sciences may have been the immediate trigger for his resignation as president of Harvard, but it was his long-simmering tension with a large swath of the Harvard faculty that laid the seeds for his downfall.
Summers's ability to manage the sprawling Fed system could matter on substantive grounds, not just in the form of bruised egos among his new colleagues. The major policy decisions that the Fed makes are not made by one man or woman alone. The Fed chair is the first among equals on the Federal Open Market Committee, which sets monetary policy, but it is an unwieldy group that includes the seven members of the Board of Governors in Washington and the heads of the 12 reserve banks around the country (only five of whom have a vote in any given year, but all of whom participate in deliberations). Even major decisions on regulatory matters are made by committee, namely by the seven-member board.
The chair sets the tone of the discussion. The Fed staff members who prepare economic projections and the range of policy options work directly for the chair. And the Washington-based governors usually go along with the Fed leader’s wishes (none has dissented since 2005), giving the chair a head start in putting together a majority.
So, at the end of the day, the Fed chairman can get the policy that he or she wishes. But the ability to persuade and firm up support still matters. If a policy change was regularly enacted on close votes, say 7 to 5, it would send a message to markets that no one was really in charge. As such, Fed chairs work hard to get something approaching unanimity, and will rarely act without an overwhelming majority. The open question is whether Summers's version of leadership would enable him to build those coalitions.
And one decision for the president to make as he weighs the appointment is whether the benefits of the collegial style that Bernanke has brought to the Fed are worth the downsides — or whether the central bank is an institution due to be shaken up.