The Obama White House’s “Larry Summers for Fed chair” trial balloon (assuming it wasn’t a ruse) is getting about as positive a reception in Washington as Texas A&M quarterback and Heisman Trophy winner Johnny Manziel did when he recently tried to crash a frat party at rival UT. It’s bad enough for Summers’ chances that Senate Democrats are circulating a letter urging President Obama to instead appoint Janet Yellen, but now we have word that (a) Summers has a previously undisclosed role as a Citigroup consultant, (b) investors aren’t fans of the former Treasury secretary, and (c) Yellen has been the Fed’s most accurate economic forecaster.
Is Yellen now a lock? UBS doesn’t think so (via Business Insider):
The politicking for the next Fed Chair has begun in earnest. A revolt by Senate Democrats has likely pricked the Secretary Summers trial balloon candidacy. Governor Yellen remains a viable candidate but, given that Summers was pushed, we also have to assume that the odds of other candidates are on the rise. Our top two alternatives at this juncture are Former Federal Reserve Vice Chair Ferguson and Former Council of Economic Advisors Chair Romer.
Matthew O’Brien makes the case that Ferguson would be a Bernankesque figure, and I have little to add to his excellent analysis. Romer, however, is the more intriguing possibility, one that could produce an Abenomics-like jolt to the flaccid US economy if she’s selected. Romer has excellent grasp on what the Fed has done wrong in the past four years, and how the central bank needs pro-growth, market monetarist reform. Here’s Romer last month speaking about the Fed’s quantitative easing programs:
But the truth is even these moves were pretty small steps. They pushed the edges of the Fed’s flexible-inflation-targeting regime, but they did not fundamentally change it. The Fed has been unwilling to do something more fundamental, such as adopt a target for the path of the price level or nominal GDP. And even the changes that have been made have had their expectations impact weakened by public debate among FOMC members about the wisdom and the desired size and duration of the program.
The bottom line is that the Federal Reserve has been unwilling to do a regime shift. And because of that, monetary policy has not been able to play a decisive role in generating recovery. To paraphrase E. Cary Brown’s famous conclusion about fiscal policy in the Great Depression: monetary policy has not been a strong recovery tool in recent years not because it did not work but because it was not tried—at least not on the scale and in the form that was necessary to have a large impact.
Spot on. And GOPers might want to consider rallying around her. They could do a lot worse that getting a new central banker from Team Obama who has the monetary policy views of Milton Friedman (updated for the 21st century) — not to mention a soft spot for tax cuts.