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What Obama should see in his Federal Reserve nominee

With President Obama due to nominate a new chief of the Federal Reserve soon, he and the Senate must focus on what today's elected leaders often miss: a long-term perspective.


Janet Yellen, vice chair of the Board of Governors of the Federal Reserve System, speaks in Shanghai, China, June 3. She and former Treasury Secretary Lawrence Summers are seen as possible replacements for current Fed chairman Ben Bernanke.


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It’s fair to say that the three most powerful positions in Washington are the president, any justice on the Supreme Court who is the frequent swing vote in 5-to-4 decisions, and the head of the Federal Reserve.

Next month, President Obama is expected to nominate a replacement for Fed chairman Ben Bernanke, who leaves in January. The next Fed chief will hold the post for four years, and maybe another four, wielding the most influential hand on the American economy and, to some degree, the world’s.

Voters can only trust that Mr. Obama and the Senate will make the right choice. The selection process itself needs to be fully transparent and with rigorous scrutiny of the nominee’s views and background.

The Fed’s main task is monetary policy, or the macro-flow of dollars for finance, mainly in setting interest rates for lending between banks. It has the twin and often conflicting goals of boosting jobs and avoiding excess inflation. The focus of the public debate so far has been over two potential nominees – former Treasury Secretary Lawrence Summers and current Fed vice chair Janet Yellen – and how much these two economists might balance job creation and inflation control.

Allowing inflation as a way to create jobs may lead to runaway inflation. But keeping inflation too low can dampen job growth. Not all Fed chiefs ride that seesaw well. Some have been late in preventing financial “bubbles,” such as a housing market gone wild with excess liquidity of money from the Fed.

Other factors will likely go into Obama’s choice, such as a nominee’s competence in economic theory (and much remains theory), real-world experience in finance, and the ability to manage the Fed’s largely secret operations and its seven-member board. The gravity of the appointment is nearly on par as that for director of the Federal Bureau of Investigation (a fixed 10-year post), which Obama just filled with a Republican.


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