The Political Fed-Chairman Choice

by: Evan Schnidman

In the past couple weeks noted economic commentators including Felix Salmon, Binyamin Applebaum and Larry Meyer have all speculated about the next pick as Fed chairman. While measured and insightful, all of these commentaries forget one key fact: in addition to being nominated by the president, the Fed chairman must be confirmed by the Senate. It is true that no Fed Chair nominee has ever been denied by the Senate, but it is naive to think it could not happen in the current polarized environment.

Just to be clear, the next Fed chairman will matter a great deal to the future of U.S. monetary policy. As I have previously noted, the Fed's current forward guidance into 2015 means very little in the context of electoral uncertainty. At best, the Fed can firmly project until the end of Bernanke's term in January 2014. I suspect that QE3 will have concluded by that point and should not be the direct concern of the next Fed chair, but that is also not guarantee.

So, how would different prospective candidates react to the current Fed policies? The names tossed around on Romney's side are Glenn Hubbard, Greg Mankiw and John Taylor. All three would likely end QE3 if were still ongoing, but only Taylor would definitely eliminate the forward guidance and attempt to raise rates immediately. Hubbard might follow a similar path, but he has shown some dovish tendencies over the years, so that is not as certain. Mankiw is likely to move toward hawkish policies slowest of the three.

On Obama's side, the three most likely candidates are Ben Bernanke, Janet Yellen and Larry Summers. While many have written off the idea of a third Bernanke term, it is certainly not out of the question. Yellen is likely to continue many of Bernanke's policies since she has already signed off on them as the current Fed vice chair. Summers is something of a wild card, but is also likely to continue to pursue somewhat dovish policies.

Despite all of the ink spilled about how these different potential nominees might behave at the Fed's helm, all of them could not make it to that point. While they all have exemplary academic records, several of these potential candidates also have dubious partisan records. Namely, John Taylor and Larry Summers. It is no secret that both men have been angling for the job for years, but in doing so both have raised their public profile by aligning with partisan policies. This partisan behavior would make it exceedingly difficult to survive Senate confirmation requiring a bipartisan super majority.

This leads us to the other candidates. Much is obviously known about Bernanke and he did garner the smallest Senate majority in any chairman confirmation vote in 2010, so it is fair to say that he might struggle to survive confirmation for a third term, especially if the Republicans control the Senate. Yellen is a much safer choice for Obama since she has every qualification required while still having some level of plausibly deniability for any failures of recent monetary policy. Romney's choices are bit less clear. Glenn Hubbard's temper and willingness to accept payment in exchange for certain research findings has garnered him some bad press, but he is very close with Governor Romney. On the other hand, Greg Mankiw has a stellar reputation amongst students and scholars and until very recently he has avoided signing off on any overtly partisan rhetoric.

Ultimately, when you weigh the fact that the Senate has to confirm a Fed chairman nominee and that the president (whoever it will be) does not want his nominee to crash and burn in Senate confirmation hearings, the two most likely candidates in 2014 are Janet Yellen and Greg Mankiw. While Yellen is more dovish than Mankiw, when weighing the tendencies of the other voting members of the FOMC it is clear that policy is unlikely to dramatically shift if either of them are the next Fed chairman. If anything, any shift in policy in 2014 will likely be the result of a shift in which regional bank presidents are sitting on the FOMC. Those regional bank presidents sitting on the committee in 2014 are notably more hawkish than those on the committee this year or next. So, forward guidance of Zero Interest Rate Policy beyond January 2014 is unreliable due more to the makeup of the FOMC that year than who we expect to be the next Fed Chair. Expect low rates to continue for the next 14 months, but beyond that point policy is far less certain.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.