Now that the Federal Reserve has started to ease a key economic stimulus, the reins of managing monetary policy to finish the job soon will be turned over to Janet L. Yellen, the central bank’s vice chair.
She won’t find it easy.
Yellen, expected to be confirmed by the Senate as the Fed’s first female chief, will be leading a very different and potentially more fractious policymaking team at the central bank. A more divisive group could be particularly nettlesome as she tries to execute the complicated exit from the Fed’s unprecedented actions to stimulate the economy after the Great Recession.
“The debate next year will be lively,” said Ryan Sweet, who follows the Fed for Moody’s Analytics.
Yellen will try to forge consensus among an incoming group of policymakers that includes some outspoken personalities.
In January, four new regional Federal Reserve Bank presidents will rotate into the 12 voting positions on the Federal Open Market Committee, or FOMC, which sets monetary policy.
Two of them, Dallas Fed president Richard Fisher and Philadelphia Fed president Charles Plosser, have been critical of the stimulus efforts that Yellen has strongly backed.
She is considered a dove on inflation – willing to tolerate higher prices in order to fight unemployment. Fisher and Plosser are inflation hawks.
In addition, with Chairman Ben S. Bernanke’s departure Jan. 31, there will be two vacancies on the Fed’s seven-member board of governors, all of whom vote on the FOMC. A third opening would be created once board member Sarah Bloom Raskin is confirmed as deputy Treasury secretary.
One opening is likely to be filled by Stanley Fischer, a legendary economist and former head of the Bank of Israel. The White House reportedly is preparing to nominate Fischer to be Yellen’s vice chair, and his presence on the Fed Board could overshadow Yellen.
By early next year, seven of the 12 voting members of the open market committee could be different than those who kept the Fed’s bond-buying stimulus program in place through 2013.
On Wednesday, Fed policymakers approved a modest reduction in the purchases starting in January.
Normally, no more than one FOMC member has dissented from the Fed’s controversial stimulus actions. That’s likely to change, said Diane Swonk, chief economist at Mesirow Financial and a close observer of the Fed. “Janet’s going to have an equally difficult, but entirely different, set of challenges than Ben Bernanke,” Swonk said.
One challenge will be managing that dissent and getting Fed policymakers to move in her direction, said Allan Meltzer, a Fed historian at Carnegie Mellon University. “Every new chairman has to face the problem of establishing their credibility as a leader,” he said. “I think she’s entirely capable of doing that.”
Bernanke, chairman since early 2006, has allowed FOMC members wide latitude in recent years to comment publicly on monetary policy between meetings, as part of his pioneering efforts to make the central bank’s actions more open to the public. But that led to criticism that the Fed’s communication has been muddled and disjointed.
The concerns were highlighted this year when many analysts and financial market participants expected the Fed to start reducing its bond-buying program in September, based on comments by Bernanke and other committee members. Mortgage rates rose sharply on those expectations through the summer.
When Fed policymakers decided to wait on a pullback, analysts said it was a blow to the institution’s reputation that could hamper its effectiveness.
“The Fed gave a head fake around tapering in September, and their credibility has taken a hit,” Sweet said.
One of Yellen’s challenges will be to refine Bernanke’s communications efforts.
As vice chair since 2010, Yellen has been a leader in Bernanke’s efforts to expand and innovate the communications strategy. He began holding the central bank’s first regularly scheduled news conferences. And Fed policy statements have included “forward guidance” to make policymakers’ thinking and plans clearer.
For most of its 100-year existence, the Fed operated largely in secret. Now there is continual flow of public speeches and interviews by policymakers.
“One thing she needs to do is rein in the board a bit. There’s too much talk between meetings,” said John Makin, an expert on monetary policy at the conservative-leaning American Enterprise Institute think tank. “They should have their say in meetings, do their voting and shut up until the next meeting.”
Fischer probably would support Yellen’s policies – a continuation of Bernanke’s – and be diplomatic in what he says publicly.
Lael Brainard, who recently stepped down from a top Treasury post, is another likely White House nominee for the Fed board. Although little is known about her monetary policy views, she probably supports Yellen as well and is experienced enough in Washington not to speak out indiscriminately, experts said.
But Fisher and Plosser have been outspoken in calling for an end to the bond-buying program.
Another new voting member of the FOMC will be Narayana Kocherlakota, president of the Minneapolis Fed. He could be one of Yellen’s biggest allies for maintaining easy-money policies, after making a 180-degree turn from inflation hawk to dove in the past few years.
The final new voting member will be Sandra Pianalto, president of the Cleveland Fed. Considered a centrist, she is retiring early next year. A successor has yet to be named.
Alice Rivlin, who served as Fed vice chair from 1996 to 1999 under Chairman Alan Greenspan, doesn’t think that Yellen will face a deeply divided committee.
Much of the dissent in the last year has been about reducing the bond-buying program. Now that the Fed is starting to pull back, the main question will be how quickly that should proceed, Rivlin said. “That sounds sort of negotiable,” said Rivlin, a scholar at the Brookings Institution.
Whatever opposition she faces from the newly constituted policymaking group, Yellen isn’t likely to have trouble exercising her authority, analysts said. Although Yellen will have a single vote just like all the other members, the Fed chair runs the show. And Fed governors rarely vote against the chair.
Most Fed experts believe that Yellen will continue Bernanke’s collegial style of listening carefully and seeking consensus, although that’s likely to be more challenging with a new group of policymakers.
“The chair is influential but not dictatorial,” Rivlin said. “It’s a committee. You have to bring the committee along.”