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Federal Reserve Succession Watch: The London Economist Narrowly Prefers Janet Yellen...

Federal Reserve Choosing the chairman The Economist

…and in so doing adopts a plan: Janet Yellen at the Fed, Lawrence Summers at the Treasury, Jack Lew at the NEC:

Economist: Federal Reserve: Choosing the chairman:

For all the political circus that has surrounded the decision, Mr Obama is choosing from excellent candidates. The two leading contenders—-Larry Summers, a former treasury secretary and presidential adviser, and Janet Yellen, the Fed’s current vice-chairman—-are both top-notch economists with years of relevant experience…. This newspaper would (narrowly) plump for Ms Yellen….

Now weak growth, not inflation, is the biggest challenge, and the Fed has to rely on less tested and more controversial tools, such as bond-buying. The next chairman will need the judgment to navigate this new world and persuade financial markets (and sceptical politicians) that the central bank knows what it is doing….

It is clearer how Ms Yellen would go about putting her views into practice…. Her public demeanour would be much like Mr Bernanke’s: technocratic and based on meticulous command of the data. Her cautious, consensus-building approach would minimise surprises….

Mr Summers has a less clearly articulated approach to monetary policy and more political baggage…. The chances are that a Summers Fed would be even bolder, but less predictable, than the Bernanke Fed. Mr Summers’s dazzling intellect would make for bravura public performances, but he would be more likely to unsettle the markets with unscripted comments and to alienate both other Fed governors and lawmakers. The Fed has had “maestro-style” leadership before… but these days the Fed uses more experimental tools, depends more on influencing expectations and has shallower political support. Transparency, predictability and consensus-building therefore matter more than they used to….

The Fed’s other big task is to prevent (and, if need be, manage) crises. Here Mr Summers seems stronger…. The vilification of Mr Summers for favouring financial deregulation in the 1990s is grossly unfair: much of what he proposed was quite sensible, and the link between those decisions and the financial crisis is weak. He clearly has the upper hand in terms of crisis-management experience, having been at the centre of almost every global financial flare-up since Mexico’s near-default in 1994.

The difference between the two is small. Supporters of Mr Summers argue that the administration would be making a big mistake if it did not employ the brightest policy-minded economist in a generation with unparalleled experience of dealing with financial trouble. They are right. If Mr Obama really wants the best people in place, he should replace his uninspiring treasury secretary, Jack Lew, with Mr Summers. It is a job that Mr Summers did superbly for Bill Clinton and which plays more clearly to his strengths. Making the switch would require uncommon decisiveness from a president who is loth to change personnel. But Ms Yellen at the Fed and Mr Summers at the Treasury would make a first-rate team.