- Articles by the Marubeni America Corporation Washington D.C. Office General Manager -
Dispatches from the Potomac

- ISSUE 02

The World is Watching: Who will be the next Fed Chair?

Takashi Imamura
Washington D.C. Office General Manager, Marubeni America Corporation

By the time this article is published, I assume there will be even more heated speculation about who will be the next Chair of the Board of Governors of the Federal Reserve System of the U.S.A (Fed Chair). I'd like to consider this here because the selection will significantly affect not only the U.S. economy, but also the Japanese economy, as well as the business of the Marubeni Group.

* This article was originally written in August for publication in the September 2013 edition of the Marubeni Group Magazine, M-SPIRIT. President Obama nominated Janet Yellen to be the next chairman of the Federal Reserve on October 9, 2013.

The Fed Chair is appointed by the U.S. President

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It is generally believed that the current Fed Chair, Ben Bernanke, will step down when his second term is completed at the end of January 2014. Originally, the financial markets and people associated with the Fed assumed that the current Vice Chair, Janet Yellen, would become the next Chair, and the major media did not show much interest in the appointment.

However, controversy suddenly flared up in late July. It all started with a post on a popular blog of the Washington Post stating that “At this point the leading candidate to become the next Fed Chair is Larry Summers.” It was believed that the source for the information was someone inside the White House who was involved in the selection. This was totally unexpected and quite a shock for the Fed inner circle, major media, and the New York financial markets; since, Larry Summers, although a former Secretary of the Treasury, has no significant experience with making monetary policy. Everyone was reminded that, regardless of any preference that the Fed or the market may have for Vice Chair Yellen, if President Obama decides that Larry Summers is a better candidate, no one can stop his appointment.

Most interesting were the reactions by media and those associated with the markets after this surprising news. There was a flood of news articles and comments by experts that were blatantly “Anti Summers, Pro Yellen”. This overly-emotional reaction in the media seemed to reveal the frustration of the Fed, Wall Street and the media, who were being forced to recognize that their influence over the selection of the chair was actually rather limited.

That being said, their surprise was understandable. Historically, these groups have had a strong influence. Up until the selection of Mr. Bernanke, for any new appointment or re-appointment of the Fed Chair, the White House economy team prepared a list of candidates by communicating with the Fed inner circle as well as market regarding their opinions and preferences. The U.S. President then made his choice from the prepared list with a full understanding of these preferences. The reason for this caution was the concern that if the President appointed someone who did not have the support of the current Fed members and the market, this could create confusion in monetary policy making, leading to an adverse impact on the operation of the national economy under his administration.

Fed Chair selection process changed by financial crises

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Financial disasters caused this historical relationship between the President and his economic team, and the Fed and financial markets to change. As the head of the National Economic Council during the first term of the Obama administration, Mr. Summers took a leading role in the recovery from a grave economic crisis. Working with Mr. Summers during this time allowed President Obama and his economic team to learn to trust Mr. Summers' fiscal management abilities. However, from the view point of the market and Fed members, Chairman Bernanke was the key player in overcoming the financial crisis, and Larry Summers, who has not been involved in monetary policy, is outside the circle.

As far as the expected roles and responsibilities of the next Fed Chair are concerned, the Obama administration, Wall Street and the Fed are on the same page. As the successor to Chairman Bernanke, who implemented bold quantitative easing (QE) policies to help maintain the stability of the U.S. economy, the new leader is expected to end these extremely lenient monetary policies without disrupting the stability of the economy. However, there is disagreement over who should be appointed to this position. While President Obama and his team prefer Mr. Summers, a man they have learned to trust, the Fed and market like Ms. Yellen better because she has been deeply involved in defining monetary policy in recent years, while working closely with Chairman Bernanke.

In addition, both the market and the Fed would like to prevent the appointment of Mr. Summers, partly because of his overly-blunt ways of expressing himself and several controversial comments he has made in the past. After the Washington Post report, there was a drastic increase in the number of articles, some very close to slander, presenting statements made by Mr. Summer's in the past proving that he did not know much about monetary policy. There was very little reporting with constructive comparisons of the actual accomplishments of Mr. Summers and Ms. Yellen. But it did not stop there. In the U.S. Senate, which approves the appointment of the Fed Chair, one liberal senator, a member of the majority Democratic party, drafted a letter in support of Ms. Yellen, citing some less-than-convincing reasons, including comments like “The financial crisis was the result of deregulation measures that Mr. Summers was promoting during the 90's.” This completely ignores the fact that Mr. Summers has recently been supporting stronger financial regulation. On the other hand, although the number of articles is fewer, there are starting to be some voices questioning the organization management abilities of Ms. Yellen. What lies ahead is a mud-slinging match with Summers and Yellen in the middle.

In order to successfully manage monetary policy, the Fed Chair must have the confidence of the financial markets. A smear campaign that damages the credibility of both candidates, on the other hand, is the last thing the Obama administration needs during the second term, when a stable economy is required. Therefore, the White House put a stop to the arguments in just 4 days, at the end of July. However, sometime this fall someone will be appointed to lead the Fed, so the controversy remains. However, if it degenerates into more mud-slinging, the White House economy team may have to look for a third candidate. Even if the list of possible successors is narrowed down to these 2 candidates, the issues of Ms. Yellen not being close enough to President Obama and Mr. Summers' lack of hands-on experience with monetary policy decision-making still remain. It is even likely that President Obama will still be struggling to make a choice by the time this article is published.

Whatever decision President Obama makes, the result will have a significant effect on the U.S. financial policies from February next year. This, of course, will have an impact on the U.S. economy, and the ripple effects will reach the global economy including Japan and emerging countries, and even the international financial and commodity markets. One of the results of the QE policies has been a large flow of investment funding from the U.S.A. to the financial and commodity markets of the emerging countries. However, it will not be possible to avoid a draining of these funds as these policies are ended. Selection of the next Fed Chair, who will lead the implementation of the Fed monetary policies, is an extremely important issue for a global company such as the Marubeni Group. We will watch Obama's decision very carefully, in recognition of its significance to us all.

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