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.
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.
The Fed was created a century ago as an independent agency – almost like a fourth branch of government – with hopes it would make monetary decisions free of short-term political interests. Elected political leaders often have policy horizons of either two, four, or six years, depending on their posts. The Fed, like the Supreme Court, must see out decades.
A Fed chief must, in other words, be sagacious. Washington, like Wall Street, has lost much of this long-term, wise perspective. The pace of both politics and high finance have quickened. Campaigning is now 24/7 with passions focused on the next congressional election. The stock market focuses too much on quarterly profits and, at least until 2008, Wall Street treated 30-year mortgages almost like daily lottery tickets, as a quick turnaround investment.
One reason the economies of many Asian nations have grown faster or more steadily than that of the United States is a culture of delayed gratification, long-term planning, and high personal savings. Mr. Bernanke has had that perspective in part because of his studies into the causes of the Great Depression. He has been cautious in what he claims to know. And he chides Congress for failing to tackle the nation’s long-term debt.
He has also done as much as any Fed chief in 30 years in rescuing the economy from calamity. He has primed it with money to lower interest rates, or what is called “quantitative easing.” His work has set a precedent for the Fed in actively guiding the economy as much as rescuing it or preventing financial panics.
The next Fed chief will take office at a time of low inflation and low job growth. At the current rate of job creation, it would take seven years to return to the job level before the 2008-09 recession.
If anyone in Washington is expected to have a crystal ball, it is the Fed chief. Yet the so-called science of economics – in which proof is often elusive – requires more than guesswork. And it certainly requires tuning out calls for short-term fixes to the detriment of building a solid base for future generations. The Fed’s insulation from politics gives it a necessary credibility with the nation’s long-term investors.
More than ever these days, the Fed stands out as an institution more farsighted than most in Washington. Obama’s nominee needs to possess that quality more than any other.