How the Summers Leak Paves the Way for Yellen
Business + Economy

How the Summers Leak Paves the Way for Yellen

Janet Yellen is sworn in as a Federal Reserve Board governor by U.S. Federal Reserve Chairman Ben Bernanke (L) in October 4, 2010 ( REUTERS/Britt Leckman/U.S. Federal Reserve/Handout )

The next Federal Reserve chairman faces one huge obstacle—Senate confirmation.

Before slipping into the most powerful economic post in the world, whomever President Obama picks to succeed Ben Bernanke must confront a Senate where nominations are routinely delayed, derailed, or used as political bargaining chips.

The Fed has become the dominant force in shaping the recovery, as Capitol Hill and the White House have been stuck in gridlock for almost four years. The next chairman must somehow continue to lower unemployment, keep inflation at bay, and throttle down several years of extraordinary measure to perk up economic growth.


Getting past the Senate—which could require a daunting 60 votes—will be the first major obstacle. Lining up 60 votes to block any filibuster attempt would require Obama to have the support of at least six Republicans, while appeasing an increasingly populist Democratic majority.

Before Bernanke’s term ends in January, financial markets expect a stable transfer of power at the Fed. But as demonstrated by the recent deal to get seven Obama nominations through the Senate, that transfer of power could easily become a political roller coaster.

“Life would be easy if it was 51 votes,” said Dan Clifton, head of policy research at the institutional brokerage Strategas.

This is the chance for the Senate to exert its control on an otherwise independent central bank, a responsibility it seemed eager to accept last week as several senators worked to torpedo the potential nomination of former Treasury Secretary Larry Summers.

The Obama administration had anonymously been floating to reporters that Summers was the leading pick for the Fed. This strategy offered them a chance to provoke a reaction on Capitol Hill without having to actually commit to the former Harvard University president.

Summers, 58, is a lightning rod of criticism for his consulting work with major Wall Street players and his past support of policies that left a sizable chunk of the financial sector lightly policed.

He encouraged in 1999 the repeal of the Great Depression-era Glass-Steagall Act, tearing down the wall that had separated commercial and investment banking for decades. Summers testified in 1998 that financial derivatives—the kinds of contracts that led to the 2008 economic meltdown—did not need to be regulated.

“That’s what this week is about—to see how the wind is blowing on some of your nominees,” said Clifton. “Do they want to avoid a fight on the floor in December and January? And how do they want to use political their capital? By choosing Larry Summers, they are going to have to put their capital on the line. And their capital is limited.”

That trial balloon was quickly popped.

Several Senate Democrats protested the idea of picking Summers, calling instead for Obama to elevate the current Fed vice chair Janet Yellen, 66, to the top spot.

According to a letter reportedly being circulated by Sen. Sherrod Brown (D-OH) and signed by many of his colleagues, Yellen “identified the impending threats that both the housing bubble and the shadow banking center posed to our entire economy. This prescience speaks to her independence, intellectual rigor, and willingness to challenge conventional wisdom regarding deregulation—traits essential for a successful Fed chairman.”

Over the weekend, Treasury Secretary Jack Lew kept mum about the entire decision process.

“I’m going to keep private any conversations that we’re having with the president on the question of when and what kind of succession there should be,” Lew told ABC News’ “This Week.” 

From the shape of things, it appears to be that Summers and Yellen are the two leading candidates.  A survey of 32 economists released Sunday by USA Today has Yellen as the favorite.

But other names have been suggested too, including former Fed vice chairman Alan Blinder, a Princeton University economist, and Roger Ferguson, another former Fed vice chairman who is currently the CEO of the Teachers Insurance and Annuity Association - College Retirement Equities Fund.

Obama told The New York Times in an interview that he is considering “some extraordinary candidates.”

In some ways, getting through the Senate gauntlet might not depend on how questions about managing interest rates and monetary policy are answered. This is because Bernanke had already laid out his plan to end the monthly purchase of $85 billion in Treasury notes and mortgage backed securities.

At a press conference last month, Bernanke suggested that the Fed would reduce the size of its buying later this year. It would then end the program known as QE3—shorthand for the third round of quantitative easing—once the unemployment rate falls from its current level of 7.6 percent to 7 percent.

This roadmap is wholly dependent on how the economy fares over the next few months. But as the analyst Sean West at the Eurasia Group noted, its existence takes away a critical line of questioning in Senate confirmation hearings.  After all, the policy has largely been set already.

“Congress will have a tougher time cornering them,” West said, adding that this is “particularly important for Yellen.” 

Some conservative Republicans see the bond buying programs as having exposed the country to the risk of inflation, since the programs effectively increased the money supply.

While the dreaded inflation has yet to materialize—it’s substantially below the 2 percent target—the standard GOP criticism could easily be directed at Yellen, who advocated for QE3 to help boost hiring.

As contradictory as it sounds, the floating of Summers’ name might even be intended to help blunt attacks on Yellen, West theorized.

As director of the National Economic Council at the start of Obama’s presidency, Summers was the architect of the $787 billion stimulus package. He has his fingerprints on a slew of programs that Republicans tried to block. Even if Republicans see Summers as reasonable, he still has West Wing ties that would be brought over to the Fed.

Yellen has none of that baggage. She had served in the Clinton administration, but had been the president of the Fed’s San Francisco bank before becoming the vice chairwoman of its board of governors in 2010. By leaking Summers’ name, the White House has highlighted her independence and tenure at the Fed.

“If that’s the case, then it’s working,” said West.