Fed: Yellen, Finally

Published on October 9, 2013

After the circus atmospherics of the brawl these last few months over who will be the next Chair of the Federal Reserve, President Obama’s formal nomination of Fed Vice Chair Janet Yellen in a brief White House ceremony at 3pm this afternoon may seem almost anti-climatic. But better late than never, and markets sure could use some certainty finally from Washington on at least this critical nomination.

We do expect Yellen to be confirmed by the Senate, although it won’t be without its complications or political calculations that may hang over the course of her tenure.

*** The key political complication is in what we understand the decision by the Obama Administration not to pair the Yellen nomination with a Republican candidate to fill one of the other two vacancies. Our sense however is that despite objections, the GOP will nevertheless pass on a filibuster threat against the Yellen confirmation. But the GOP will put a marker down promising much tougher battles over filling what will be up to four more slots next year on the Fed’s seven-member Board of Governors. ***

*** Her nomination amid the white hot political battles of the shutdown and debt ceiling notwithstanding, Yellen’s path to confirmation is likely to take several weeks. The earliest the Senate Banking Committee confirmation hearings are likely to take place is late October or early November, with the full Senate vote around Thanksgiving and probably the first week of December. That, in turn, is likely to take Yellen out of the Fed’s “communications re-set” over the next critical months (see SGH 10/1/13, “Fed: Forward Guidance, Fiscal Retrenchment, and the Taper”). ***

No Pairing Template

The irony of the politics of Yellen’s confirmation is that little is in the end likely to have much to do with the Fed’s current path on monetary policy. Some of the more conservative on the Republican side will make noises about the Fed’s “printing money” and “enabling” the high deficit levels of the last few years, but most of the policy duels, if any, will come on the regulatory side and being tough on the big banks.

But threaded throughout the debate over her confirmation and much of the media coverage, especially in the blogsphere, will be the absence of pairing her nomination with the nomination to fill her vacant vice chair position with a Republican nominee. The minority Republicans made a concerted effort to block the nomination of Peter Diamond a few years ago while letting Yellen’s nomination as Vice Chair sail through with relative ease.

By the time the Obama Administration moved to fill the two vacancies at the time, they agreed to pair their nomination of Jeremy Stein with a Republican candidate, Jerome Powell. it was widely assumed the precedent of this so-called “pairing template” ensured a pairing to future appointments as well.

But that doesn’t appear to be the case with Yellen’s nomination. She alone will be standing alongside President Obama and the departing Fed Chairman Ben Bernanke later today.

We understand that the economic advisors to the President feared it would be too risky to bring a Republican to the Board so soon because it could mean a potential “third dissent” next year against the highly accommodative policy path being mapped out by Yellen and the majority of the voting members of the Federal Open Market Committee. Next year, two highly visible district hawks are rotating in as voting members of the FOMC, Philadelphia’s Charles Plosser and Dallas’ Richard Fisher.

The calculation is a daring one, in effect almost baiting the Republicans to have a go at the first woman to be nominated to head a major central bank. But our understanding is that, for now, the Republicans are unlikely to “go to the mat” over the Yellen nomination. But they will make it clear they will not make future nominations to fill the rest of the vacancies on the Board without major, potentially market moving battles to ensure a match of a Republican nominee to each nomination by the White House.

With Yellen vacating her Vice Chair position to assume Bernanke’s Chair, it leaves three immediate Board vacancies to fill. Betsy Duke left the Board in August, and Sarah Bloom Raskin left in September and is waiting for her confirmation as Deputy Treasury Secretary.

In addition, Governor Stein is likely to leave the Board to return to Harvard next year, and the end of the short term for the other Obama appointee, Jerome Powell, comes at end of next year, meaning he too will have to be re-nominated by the Obama Administration or filled by another nominee.

What’s more, the still vacant second Vice Chair for Banking Supervision, created under the Dodd Frank legislation, will ideally be filled next year. Right now, Fed Governor Dan Tarullo is tipped to finally be given the position since he is already overseeing the Fed’s regulatory duties. But if for any reason he is passed over, or perhaps takes another position in the Obama Administration, his slot would also need to be filled.

Timetable to Confirmation

In the weeks ahead after the nomination ceremony this afternoon, the tradition is for her home state Senator, either Democrats Dianne Feinstein or Barbara Boxer from California, to escort the Fed nominee for courtesy calls with members of the Senate Banking Committee over the next few weeks.

The Committee would then hold its confirmation hearing, which we suspect may not come until early November, unless Senate Majority Leader Harry Reid is able to accelerate the timetable. Yellen will almost certainly clear the Committee, probably with a 12 or 13 vote support against 10 or nine opposing. The dozen Democrats are all but certain to vote in her favor, and she may pick up a vote from Mark Kirk, a Republican moderate from the blue state of Illinois. The other nine Republicans may all vote against her, led by Tennessee’s Bob Corker who has already indicated he is likely to vote no.

Bernie Sanders, the independent from Vermont may vote against Yellen as a matter of principle to vote against anything to do with the Fed. On the Republican side, there may be threats to filibuster from the far right, such as Texas Senator Ted Cruz or Kentucky’s Rand Paul. But the majority of the Republicans are in fact likely to vote for cloture to end the filibuster threat, more as a slap at Cruz and Paul than as a vote endorsing Yellen personally.

There likewise may be a concerted effort by Senate Minority Leader Mitch McConnell to impose party discipline to maintain a 46 strong party line no vote to put a marker down to maintain the pairing template. But on the other hand, there are at least six or maybe more Republicans, who often buck their party, likely to vote in favor of Yellen.

Again, we do think her confirmation is assured since it will only require a 51 vote majority, and she is in fact likely to draw in the vicinity of 60 votes.

Among possible if not likely Republican votes are those from the three female Republican Senators (New Hampshire’s Kelly Ayotte, Maine’s Susan Collins and Alaska’s Lisa Murkowski) are joined by relative moderates Lindsey Graham of South Carolina, Kirk from Illinois, and Arizona’s John McCain, and one more, possibly New Jersey’s appointed Senator Jeff Chiesa.

It would nevertheless still be lower than the 70-30 vote confirmation Bernanke received on his second term, and would be the lowest, and most partisan, level of political support to a Fed Chair ever.

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