Fed: No, Virginia, He Is Not Stepping Down Early

Published on December 13, 2013

One of the more bizarre rumors that has persisted for more than a week now is that Federal Reserve Chairman Ben Bernanke will step down early, on the eve of the next week’s Federal Open Market Committee meeting no less, to give way to Vice Chair Janet Yellen. Yellen is likely to be confirmed as his successor in a Senate vote before it adjourns by the end of next week.

*** We keep hearing it too much to ignore, so we thought a quick Friday the 13th note was warranted to say with near certainty that Bernanke will be serving out his full second term to January 31, 2014, and is hardly likely to resign before then. Yellen’s first FOMC meeting in the chair will be March 2014.***

*** On a more interesting and important note, Stanley Fischer, the pre-eminent scholar of macroeconomic theory, former IMF Deputy Managing Director, and recent Governor of the Central Bank of Israel, will indeed be nominated by the White House to the Federal Reserve Board of Governors. The 70-year-old Fischer, whose nomination could be announced before year-end, will assume the vice chair slot vacated by Yellen. ***

Fischer Indeed

The Bernanke rumor is almost too goofy to acknowledge, but we felt we had to since it has persisted for days now, and may even be influencing some of the expectations for next week’s FOMC meeting — a “dovier” outcome under Yellen at the helm than Bernanke we assume is the basic theme.

There is nothing particularly wrong or impossible about stepping down from a position if your successor is in place. But the question to ask is why on earth would he do that? The transition is likely to go smoothly enough, all sorts of rumors would be needlessly set off, certainly more damaging than this one, and he would miss all the holiday and goodbye parties.

The arrival of a new member to the Board with the stature of Fischer, however, is big news. The combination of Yellen and Fischer at the helm of the Fed will make for one of the most muscular Fed leaderships in decades, going back to the days when Fed Chairman Paul Volcker was running the Fed with New York Fed President Jerry Corrigan close by. Indeed, we understand Yellen has been strongly supportive of the nomination, and why not, his arrival will bring a powerful boost to the Board and to the FOMC on at least three fronts.

The first in terms of the intellectual gravitas has already been widely reported in the press. Likewise, his years at the IMF and the depth of his crisis management experience during the Mexican and Asian crises of the 1990s was one of the major draws that most appealed to the Obama Administration and to Yellen, or for that matter, Lawrence Summers, who is understood to have also pressed for his appointment to the Fed.

But what Fischer will also bring to the Fed are strong managerial skills. The IMF is said to never have been run as efficiently as it was during his years as the deputy under Managing Director Michel Camdessus. That is going to be as critical to the Fed as his policy gravitas, since the Vice Chair position traditionally entails much of the internal operational responsibilities. Fischer will also be a boost to the working culture of the Board, and to the staff.

Other Board Appointments

Fischer is likely to be confirmed by the Senate once he is officially nominated, especially if a 51 majority vote is all that is needed in the stormy Senate.  That there may be some political sensitivities to naming Fischer to such a powerful position as the Fed vice chair when he has served at a foreign central bank is one reason the White House may have opted to float his name as a trial balloon rather than just announcing his nomination. But Fischer has been a naturalized US citizen for decades, and that the foreign government was Israel, should help to mute any criticism.

In fact, the politics may work in his favor rather than against him, and he will probably draw more criticism in a Senate confirmation hearing for his short tenure at Citicorp than for his Israeli citizenship.

The two other nominees to fill the vacancies on the Board will be, as widely reported, Lael Brainard, the former Undersecretary of Treasury for International Affairs, and Janice Eberly, a former Treasury Assistant Secretary for Economic Policy. We have not heard anything to indicate that Governor Jerome Powell will not accept a reappointment, or that Governor Dan Tarullo will not be staying at the Fed, probably with a promotion to fill the Vice Chair for Banking Supervision slot.

The influential Jerome Stein is, however, likely to leave the Board this spring and no later than late summer, to return to Harvard University. Harvard, it seems, offers little consideration that a position like the Federal Reserve warrants leeway on its rule on a two year sabbatical limit without risk of losing tenure.  We understand the White House may focus its search for a successor on someone with a background in the markets or banking, which is where the biggest hole in the composition of the Board lies, but it is early days for that search.

We have no firm sense of the timing when all three will be announced, but we understand the three will be put forward as a package, along with the reappointment of Governor Powell. The White House will certainly wait until after Yellen is confirmed before making any announcements, but it could come as early as over the Christmas break.

In any case, the sooner the names are put forward, the sooner the process can begin of courtesy calls to the Senate, perhaps by late January, with hearing dates scheduled perhaps in February, if things move a bit faster than a normal political schedule. In any case, Yellen could have a full Board in place by the time of her first FOMC meeting in the Chair on March 18-19.

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