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You are here:Home>>Strategic Research & Analysis>>US Fed Chairman:Summers has upper hand than Yellen
Thursday, 01 August 2013 17:44

US Fed Chairman:Summers has upper hand than Yellen

Written by Emeka Chiakwelu
Summers (L) and Yellen (R) Summers (L) and Yellen (R) photo: zerohedge.com

Ben Bernanke, head of Federal Reserve Bank will be completing his second term on Jan. 31st 2014.  Every indication is pointing to Bernanke relinquishing the position at end of second term for he does not have the interest for third term. Probably, he will be returning to private life or returning back to Princeton University.

 

The two candidates for his replacement waiting at the door - Lawrence Summer and Janet Yellen are super qualified for the job.  But only one person is needed to fill the vacant position when Bernanke signs out.

 

Janet L. Yellen is the current  vice chairman of Fed and looks like everybody is anticipating that she will get the job as a continuation from her boss, Bernanke.  Her extensive experience, knowledge and educational background prepared her for this moment. Moreover, a history will be made if she lands the job for there is never been a woman Fed chief.

 

But not too fast, Yellen is competing with a strong and connected candidate, Lawrence Summers, who was a former economic adviser to President Obama. Summer does not need an introduction; he has been around the block.  He was in academia and government bunch of times, a former president of Harvard University and former Treasury Secretary.  He is known to be extremely smart and knowledgeable; most important he knows his way in Wall Street and White House.

 

Summer is a bold and direct in making his point, and sometimes he comes across as proud and know-it-all but nobody can deny that he is über intelligent and may be exactly what US needs at this moment. Summer is an outspoken technocrat who can effectively lead Fed, a significant component of the government that has the mandate to control inflation and render maximum employment.

 

I think that Summers may get the position because he has been around. He has firmly shaken more hands in both political class and financial community; he may not be liked by many but without any doubt he is well respected and cannot be intimidated by either by Wall Street or Beltway politicians.

 

Many pundits may disagree with my analysis and observations, for many of them are looking favorably to Yellen being appointed the head of Fed. John Cassidy's piece in The New Yorker, gravitated more to Yellen  but he also recognized that both of them are equally same in ideology and effectiveness  except on their presumed view on  monetary policy, more importantly on Quantitative Easing:

 

"From a monetary-policy perspective, what the White House wants, above all, is a Fed chair who is committed to growing the economy and bringing down unemployment. Both Yellen and Summers are in the “dove” camp, focussing on fixing unemployment before worrying about inflation, but Yellen is probably the most firmly committed to expansionary policies. Earlier this year, she suggested that the Fed might want to keep the federal funds rate close to zero even after the unemployment rate falls below 6.5 per cent, which the central bank has identified as a key threshold. As I pointed out in a post back in April, Yellen would arguably be the most dovish head of the Fed since Marriner Eccles, whom F.D.R. appointed during the Great Depression."

 

Cassidy continued, "Summers, in his recent commentary, has also written about the perils of high unemployment and the need for expansionary policies. But he has also raised some legitimate questions about the efficacy of quantitative easing—the Fed’s tactic of spending tens of billions of dollars every month to buy long-term bonds in an effort to reduce long-term interest rates. Nominating Summers could create an expectation that the Fed would wind down quantitative easing more rapidly than the market currently thinks, which could conceivably lead to a spike in long-term rates. At the very least, Summers would need to deal with the perception that his appointment could lead to a change in policy."

 

President Barack Obama, with former Director of the National Economic Council Lawrence Summers at the White House in this 2009  Photographer: Shawn Thew/EPA


Not only Larry Summers is concerned about quantitative easing, many economists and market observers were worried that cheap supply of money might trigger hyperinflation. But that has not been the case, rather inflation has been nose-diving. Thanks to the zero interest rate that Fed loans money to the banks.  Then the banks will turn around and loan money to the government at 3 percent interest rate to finance government’s deficit.

 

 

In his interview with New York Times, President Obama speaking on Fed vacancy alluded that he has come close to, if not already made the decision on who will be replacing Bernanke. President Obama said, "What I’m looking for is somebody who understands the Fed has a dual mandate, that that’s not just lip service, that it is very important to keep inflation in check, to keep our dollar sound, and to ensure stability in the markets, but the idea is not just to promote those things in the abstract,” and he stressed. "The idea is to promote those things in service of the lives of ordinary Americans getting better."

 

Obama’s America is facing way too many challenges especially the scrawny economic growth that affecting the nation’s well being. The problems of unemployment and making sure that recession and inflation do not creep into the economy are the greatest challenges to be face by the next head of Fed. Unemployment is the big one, Bernanke did not take is lying down, he had pulled all the strings he can within conferment of Fed monetary policy. He kept the inflation low with zero interest rate and steady supplications of hope, buttressed with Quantitative Easying (Qe1 and Qe 2) applications.

 

But even with QEs America is not out of the wood, “The real numbers are bad enough: 7.6% unemployment, nearly 12 million unemployed, another 8 million working part-time for economic reasons, 47 million on food stamps,” as David Goldstein wrote in Market Watch recently.

 

Bernanke has already set the pace as was acknowledged by President Obama in the New York Times interview: "Ben Bernanke, by the way, has done a fine job as Fed chairman. And when you look at Ben Bernanke’s testimony, not just last week but over the last couple of years, what he’s consistently said is right now, our priority needs to be growing the economy faster and strengthening incomes for ordinary Americans." The issue of unemployment maybe beyond the powers of monetary policy and needs the aid of private industry to invest more in R and D, that stimulate more growth.

 

The new Poll advanced by Associated Press that 80 percent which is about “4 in 5 U.S. adults [that] struggle with joblessness, near poverty or reliance on welfare for at least part of their lives,” is not encouraging. This is why that the next head of Fed has a big task and cannot afford to be a minimalist.

 

 

Emeka   Chiakwelu, Principal Policy Strategist at AFRIPOL. His works have appeared in Wall Street Journal, Huffington Post, Forbes and many other important journals around the world. His writings have also been cited in many economic books, publications and many institutions of higher learning including tagteam Harvard Education.                  www.afripol.org,         This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Last modified on Friday, 02 August 2013 16:58

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