The debate about the next FED’s chairman has been intensifying as time is running out for Barack Obama to nominate the right person to work closely with the White House to solve the several economic problems the US economy still has to face. Five years after the FED cut its interest rates to near zero and trillions after starting a strong policy of quantitative easing, the FED had eventually boosted the economy, at least out of recession, but many doubts are casted on the effectiveness of such policy so far. With QE “tapering” being the most speculated FED action, Obama will have to carefully decide on whether he wants to continue with the current dovish policy or eventually change the decision center to the Government. The effectiveness of tax-cutting and expansionary fiscal policy on economic output and employment levels is proven and probably the best way to go in the future while most of the effects of monetary easing on GDP and employment are unproven and thus experimental. The easiest way to go is to continue to purchase assets. With inflation contained, many FED officials see no reason to stop the current policy. The idea is to keep Treasury yields low, allow for the government to get low-cost financing, and inflate risky asset prices. These conditions would eventually lead to GDP growth and employment. But, reality isn’t that simple. A massive asset purchase program requires printing dollars out of thin air, which means a large debasement of the dollar and an international currency war with long-term consequences that may be damaging for the US economy. If the dollar is perceived as an unstable and managed currency, it may be the case that it is substituted in international trade. With countries like China, Brazil, Russia, India, and South Africa unhappy with the current monetary developments, the odds for this happening are quickly rising. The dovish at the FED have been ignoring these long term costs but that doesn’t seem to be the case with President Obama, which stated the next FED chairman must be someone who understands its dual mandate but who is able to keep inflation in check, to ensure financial stability, and to keep the dollar sound. The President emphasized the need to care with inflation and with the effects deriving from too much monetary easing. President Obama wants someone who can boost the economy as needed but without creating bubbles as have been created in the recent past.
Currently, there are three contenders for the nomination of next FED’s chairman. Between them, there are similarities, in the sense they all are pro-Keynesian who won’t hesitate in using monetary policy as a dual mandate tool unlike the European more hawkish view, in special coming from the Austrian School of Economics. But there are some substantial differences between the candidates regarding the use of unconventional monetary tools to boost the economy. Let’s briefly look at each candidate.
Janet Yellen, 66, is the first contender in our list and the top on Wall Street’s preferences. She is an economist and professor who currently serves as the Vice Chairwoman of the Board of Governors of the Federal Reserve System. Basically, she is an insider. One with a strong connection with quantitative easing. She’s seen as a continuation on Ben Bernanke and a strong believer on the effectiveness of current QE programs as booster of economic performance.
Larry Summers, 58, works at Harvard University faculty and served as Secretary of the Treasury from 1999 and 2001 under Clinton administration. He has also been advising President Obama in several matters. Summers has a large experience in solving crisis problems and a strong background in economics, which may give him an edge over other candidates. He casts doubts on QE effectiveness and will certainly be quicker at reverting the current $85 billion asset purchase program if elected than Yellen.
The last contender is another FED insider, Don Cohen, 70. He worked inside the Federal Reserve System for 40 years but he’s now retired and older than the others. After five years of experimental monetary policy, the next term may require an energetic President able to find solutions not given by textbooks. Nominating a man who is already retired may not be the way President Obama wants to go.
For now, Yellen is leading the race but President Obama has lately been pushing for Summers. But until next fall many things can still happen and we’ll have to wait. For now, monetary easing will stay tuned to $85 billion per month and it is very unlikely that the FED changes it over the next meeting between September 17-18 as the German election will occur on September 22, something that can move markets violently, and a party Bernanke will certainly avoid to expand with any tapering.
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