ECON430-Topic #1: The New Federal Reserve Chair

As of now, it is expected that the next Federal Reserve Chair will be Larry Summers, Janet Yellen, or Donald Kohn. Each of these economists has their own particular views on how monetary policy should operate, but they are all aligned in a similar school of economic thought. The three opinion articles linked here all give a slanted opinion about who should be the Federal Reserve chair. Generally however, Summers and Yellen have each had long careers publishing theoretical and/or applied work. Janet Yellen andLarry Summers published extensively, while Donald Kohn has essentially been a career central banker. Currently, it is believed that the front-runner is Larry Summers, however he may face a difficult confirmation fight in Congress, so the job may ultimately fall to someone else.

Questions you might consider

  • Given each of these individuals has their own take on how monetary policy should operate, who should take the reins at the Fed and why?
  • If you believe someone else should be Fed  chair, give reasons why they might be the best person to lead the monetary policy of the U.S.
  • What past monetary policy research have these economists done that makes you believe they are not good for the job?
  • A Fed chair should have certain traits in order to be successful. In spite of these individuals long careers, what traits do you believe makes one of these candidates stand out as a good or bad candidate. Why does this trait separate them from the others?

12 thoughts on “ECON430-Topic #1: The New Federal Reserve Chair”

  1. Don Kohn seems like he would be the best bet for the Chairman of the Federal Reserve. He has over forty years of experience in the Federal Reserve, both with the past two chairmen, Ben Bernanke and Alan Greenspan. Since Kohn has so much experience with the Federal Reserve, it makes sense that he would be appointed in hopes of handling a crisis in the best possible manner. All experience aside, Kohn appears to be very objective rather than subjective. Due to the fact that he is apolitical, meaning he does not associate himself with any specific party, it suggests that Kohn will not pick favorites or fall into a particular mold associated with a political party. Whether he initiates more government intervention or prefers laissez fair policies, he seems flexible when looking at the Federal Reserve’s mandate of high employment, stable prices, and low inflation. President Obama should realize the opportunity at hand to appoint Don Kohn as the Chairman of the Federal Reserve due to his experience and objective nature.

  2. Throughout their careers, both Ms. Yellen and Mr. Summers have been dovish on inflation (Janet Yellen for Fed Chair, The Economist). It is likely that either candidate chosen will take commensurably similar tacts as the new Fed chair. It seems important though to look at how each candidate will go about carrying out similar policy. If their past is any indication, Mr. Summers has been more controversial and carries out his actions with flair. Ms. Yellen seems to be on the opposite head of the same coin. While Mr. Summers carried on in the democratic circles, served as Mr. Clinton’s treasury secretary, and on Mr. Obama’s National Economic Council, Ms. Yellen has been decidedly more quiet politically, jumping from the reserve bank in San Francisco to Vice-chairman of the Fed since 2010 (Summers v Yellen, The Economist).Yellen seems the better candidate for two reasons: Mr. Summer’s political affiliations in the past may make it difficult for him to make it through the appointment process and Yellen’s long-standing with the Fed would provide for a more consistent transition in leadership. The ladder of these two reasons would seem more beneficial to a Federal Reserve trying to oversee an economic recovery. No central bank wishes to see dramatic changes in its policy regardless of who is at the helm, but this is made especially more apparent during a shaky recovery.

  3. Janet Yellen should be appointed as the new Fed Chair by President Obama. Yellen has spent the last three years as Vice Chairperson to Ben Bernanke. This position has allowed Yellen to become most knowledgeable about the current monetary policies and economic plans that have been implemented by Bernanke. This familiarity with current policies will allow Yellen to assume the position without having to worry about market volatility upon her entrance. Many observers relate Yellen’s public demeanor with that of Ben Bernanke’s: “technocratic and based on meticulous command of the data. Her cautious, consensus-building approach would minimize surprises (and financial-market volatility) as the current chairman has (The Economist 2013).” This statement shows that a new Fed Chair with common knowledge and similar principles and demeanor will cause markets to transition seamlessly. In 2010, Yellen went against her “dovish” ways concerning interest rates by stating “It is conceivable that accommodative monetary policy could provide tinder for a buildup of leverage and excessive risk-taking in the financial system (Washington Post 2010).” This shows Yellen’s ability to consider different schools of thought and implement them into her value set; an admirable attribute for a candidate running for such an important position as Fed Chair.

  4. Since 2008, the financial crisis has been a lingering issue. Because of this, it is evident that Don Kohn possesses an experiential trait that is a cut above his competitors. That is, he was behind the scenes during the financial crisis of 2008 (Irwin, washingtonpost.com). This is the type of experience that is extremely desirable for the next Federal Reserve chair, as poor decision making in the event of another financial meltdown could prove to have disastrous effects for the US and global economy. Kohn’s firsthand experience with Bernanke during his ’06-’10 term as vice chairman provides him with insight on what was going on in the Fed leading up to and during the crisis. In turn, the likelihood is greater that Kohn would be able to discern both warning signs that may have been overlooked by Fed leaders, or measures taken by the Fed that were helpful/harmful after the fact than any of his competitors. No other candidate exemplifies such a trait that would make them as effective in improving upon the proactive and reactive measures taken by the previous Fed leaders in the event of a crisis as Kohn.

  5. As interesting as I think it would be to watch such an abrasive personality as Larry Summers in such an important role as Fed President, I believe Janet Yellen is the best candidate for Fed President. The two main topics I focused on in forming my opinion were the fact that the Fed is chartered independent of the federal government and the inevitable tapering of Fed asset purchases to come. It is known that Larry Summers has relationships with many large players within the federal government. John Sims mentioned in a previous post how this may make it difficult for him to get through the appointment process. His involvement with the government, however, is alarming to me for additional reasons. The Federal Reserve is meant to be an entity independent of the federal government (federalreserve.gov/faqs). I believe the Fed President should aim to conduct him or herself by the rules that govern the institution they are in charge of. Mr. Summers’ proximity to the government may get in the way of his ability to do this. Although Yellen has had involvement with the Federal Government in her career, people seem to think she has remained less involved than Summers. Mr. Summers’ role in both the Asian financial crisis and the most recent global financial crisis are also quite alarming (“Why Janet Yellen…”, Stiglitz). Also, Yellen is a known supporter of the Fed’s bond buying, but has spoken out against the bailouts and other post-crisis actions of the Fed (“Why Janet Yellen Should Succeed Bernanke”, Blair). I think a new, fresh opinion from an individual who has studied the effects of recent monetary policy but was a little farther removed will be helpful in easing markets when Fed tapering begins.

    Outside Sources: Blair Article – http://finance.fortune.cnn.com/2013/07/22/janet-yellen-federal-reserve/

  6. As previously mentioned, John Summer’s bold personality and political baggage make him an inferior choice to Janet Yellen. I derived my argument that Yellen’s forward-looking perspective and risk-minimizing perspective are the largest differentiators between Yellen and the other prospects for Federal Reserve Chair. In her speech on Macroprudential Supervision and Monetary Policy in the Post-crisis World, Yellen outlines the reason individual’s believed markets could police themselves is due to the backward looking argument that the markets responded positively to many tests leading up to the financial crisis in 2008 (e.g. Asian crisis) and therefore must be able to regulate themselves freely. Yet, deregulation caused excessive risk-tasking, which employed largely negative impacts on the economy. In addition to analyzing how a policy can impact the future (as opposed to the historical trends of markets), her desire to employ regulatory tools that can minimize systematic risk (without being excessively strict) is highly appealing. Macroprudential policy aimed at protecting the financial system, such as requirements to hold higher quality capital, is her main focus for minimizing systematic error. Yellen’s desire and ability to make foreword looking decisions combined with her low-risk, predictive tendencies are the major reasons why I believe she is the preferred Fed Chair.

    Macroprudential Supervision and Monetary Policy in the Post-crisis World – Yellen Speech: http://www.federalreserve.gov/newsevents/speech/yellen20101011a.htm

  7. In the face of previous posts and many of the opinions articles linked above, I believe Larry Summers is the right choice to chair the Fed. One of the most important considerations in the next Fed chairman is their views toward monetary policy. Paul Krugman notes that we need “a committed dove” to continue current accommodative monetary policy. Krugman believes Summers checks this box (“The Fed Succession”). I believe the next Fed Chair also needs to be a strong leader. Though Summers has been viewed as abrasive, he is battle tested through his (sometimes controversial) experiences as Chief Economist at the World Bank, Secretary of the Treasury, and President of Harvard (Stiglitz, Klein). Yellen and Kohn have only been in supporting roles as vice chair of the Fed, and thus have worked behind the scenes and not necessarily had to take the full heat. Finally, it is important to consider the likelihood of a successful nomination. Neil Irwin argued that Summers may have difficulty being successfully appointed due to his perception as an insider in the Obama administration. Previous commenters have echoed this sentiment. Despite Joseph Stiglitz and other commenters on this blog arguing Summers’ role in financial deregulation as a negative, I view his past as a positive in terms of making him more attractive to Republicans in the Senate, thus counteracting his perceived coziness with the Obama administration. While no candidate is perfect, I believe Summers possesses the most important qualities to succeed as the next chairman of the Federal Reserve.

  8. Although the debate for next chair has gravitated to center Yellen, Summers, and Kohn, there is one name not so publicized that should receive recognition. Stanley Fischer, beloved and respected by many economists, has gathered much support as of late. He is an accomplished academic economist, as well as a proven crisis manager. Also noted, he mentored current Fed chair and European Central Bank President, Ben Bernanke and Mario Draghi. Fischer previously held the NO.2 position at the IMF and as of late was the head of the Bank of Israel. It’s the view of many of their peers, that Fischer’s temperament would be desired over that of Summers, the assumed front runner. Under his tenure at the IMF as deputy managing director, he’s work through various crises such as those of Mexico, East Asia, and Russia. This provides him with greater insight when considering our monetary policy and its effects on emerging markets today (e.g. Taper Talk). As a choice outside the Fed, Fischer brings a new perspective to present and unforeseen challenges. Ted Truman of the Peterson Institute for International Economics says, “The Fed needs to re-establish its unquestioned accountability and reputation for all-round competence as the protector of stability,” Truman argued. “This will require a leader who is an agent for change, not someone who was heavily involved in past decisions.” While each candidate brings their own expertise to the seat, I believe Fischer’s extensive history in crisis management and isolation from American politics and institution should propel his name to the forefront of Fed chair candidates.

    Outside Source: Washington Post Article
    http://www.washingtonpost.com/blogs/wonkblog/wp/2013/08/26/the-most-qualified-candidate-for-fed-chair-isnt-summers-or-yellen-its-this-guy/

  9. What is important to us?
    It seems as though Janet Yellen has had more time in the eye of the public and would guide the economy through a stable, low risk, and consistent growth. Whereas I believe Summers would result in higher volatility. With Yellen’s experience as Vice-chair, I’m assuming that she will continue to employ the current paradigm of monetary policy. Investment is large component of GDP and as an individual with a desire to understand the asset market, I’d prefer a chair candidate that I trust and believe I can predict. I want the Fed to transition out of their influence over the market in a smooth transition, which will require clear advanced warning by the Fed. I anticipate that when the “tapering” begins, the bond yields will rise which should hurt the borrowing market therefore slowing potential investment which includes housing. Another opinion of the cause of the financial crisis was the governments push to get every American owning a house. Not that I agree with this viewpoint or don’t want people to have homes, but there are other forms of investment with the potential for greater benefits.
    http://ideas.repec.org/e/psu137.html
    http://ideas.repec.org/e/pye21.html
    http://www.washingtonpost.com/blogs/wonkblog/wp/2013/07/31/eight-things-you-need-to-know-about-don-kohn-who-just-might-be-the-next-fed-chair/
    http://articles.economictimes.indiatimes.com/2013-09-07/news/41854909_1_crisis-larry-summers-crises
    http://www.washingtonpost.com/blogs/wonkblog/wp/2013/07/23/right-now-larry-summers-is-the-front-runner-for-fed-chair/
    http://www.investopedia.com/

  10. First off it is interesting to note that up until recently public opinion suggested that Larry Summers would be the next Fed Chairman. However, according to the Washington Post, Summers withdrew his name from contention this afternoon leaving only two strongly considered candidates. I agree that Janet Yellen would a prudent choice because as previously suggested she has an intricate familiarity with the current Fed policy allowing for a smoother transition period. However, a similar argument could be made for Donald Kohn because he, like Yellen, has served as the Fed vice-chairman under Bernanke post financial crisis. As mentioned Kohn also has 40 years of experience at the Fed, much of that spent as Alan Greenspan’s closest advisor. This experience clearly served him well as he demonstrated his forecasting prowess in his economic outlook speech in April of 2010. In his speech he predicted a slow moving recovery requiring an abnormally low level of interest rates. Finally in that speech he demonstrates both his ability to be open minded about necessary monetary policy as well as favor for discretionary measures. This would suggest he has a “dovish” attitude toward inflation which has been pointed to as a positive trait for both of the other candidates.
    http://www.washingtonpost.com/business/economy/larry-summers-withdraws-name-from-fed-consideration/2013/09/15/7565c888-1e44-11e3-94a2-6c66b668ea55_story.html
    http://www.washingtonpost.com/blogs/wonkblog/wp/2013/07/31/eight-things-you-need-to-know-about-don-kohn-who-just-might-be-the-next-fed-chair/
    http://www.bis.org/review/r100414e.pdf

  11. One of the most important qualities for the new Federal Reserve Chair to have is to be able to analyze and conduct monetary policy from an unbiased viewpoint. The other two main candidates; Janet Yellen and Larry Summers, have already served on administrations during their career and may have some political party ties. Donald Kohn is the best candidate because of his political neutrality, years of experience, and personality. He was a part of many important decisions made by the Fed during the recent crisis which proves he can handle financial dilemmas when they are at their worst. Along with being seated beside Bernanke for four years as vice chairman, Kohn has served the Fed for over 40 years during which he was known for his cautious but respected approach to policy. One of Obama’s biggest problems is the large divide between republican and democratic government officials which leads to filibusters and huge delays. Problems like this can occur in the Fed with many economists’ viewpoints being separated into Keynesian, New Keynesian, Classical and so on. In order to deviate from this problem in the Federal Reserve, an apolitical chairman would provide a different look on financial plans and policy by having independent viewpoints instead of being predominately towards one thought. Personality tops off his resume due to his prestigious relationships with the international community of central bankers.
    http://www.washingtonpost.com/blogs/wonkblog/wp/2013/07/31/eight-things-you-need-to-know-about-don-kohn-who-just-might-be-the-next-fed-chair/
    http://www.bloomberg.com/news/2013-08-01/fed-chairman-search-expanded-by-obama-mention-of-kohn.html

  12. Overall with research and personal consideration i would believe Donald Kohn is the best choice for the position as new Fed Chair. As many others have mentioned in support of Kohn is that he has the necessary experience to be a successful. Along with the experience Kohn has the trait of being very transparent with his decisions. This is not something that is seen in Yellen or, Summers. Especially since Summers is in public eye and will have trouble getting to put into office. Kohns transparency and experience is what i would want to see in a Fed chair, someone that will make the decisions that need to be made and not make decisions the government, or the people want to be made. This can be seen multiple times throughout his career. Even though he has been retired for three years his return would be great. A downfall to Kohn getting in is the support that Bernanke has given him in the past and thinks he used to be an invaluable part of the economic society. His moderate views, and not taking republican or democratic side, would also be a slight change of pace in decision making in The Fed, which he is famous for being able to smooth relations between Washington and The Fed. The fact he has moved up the ranks working from the bottom up in the Fed means his knowledge of the whole system is superior than the other two candidates.

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