The Contest to Lead the Fed

After Congress revamped the Federal Reserve Act in 1935, construction began on a new home for the Fed—liberating the Fed from sharing quarters with Treasury. This 1937 photo of the Eccles Buiding under construction reminds us that the original 1914 Fed was not set in stone and that it continued to evolve over its history. (Squint, and you’ll see the crane dropping the Fed’s glass ceiling into place.)

This summer’s contest over the future leadership of the Fed signals the continuing development of the Fed. As defenders of Larry Summers and Janet Yellen wage public and private campaigns for their candidates, it’s worth stepping back to consider the broader import of this battle over the leadership of the Fed.

First, let’s be clear: previous presidents have deliberated over short lists of potential Fed chairs. Reagan (ironically) felt that Paul Volcker the Democrat was too hawkish, so he needed to appoint the Republican Greenspan. George W. Bush selected Ben Bernanke over two competitors who had stronger political ties to the president. But the public contest between advocates of Summers and Yellen is unprecedented. The Atlantic’s Matt O’Brien captures it best:

Still, we shouldn’t be surprised about the politicized selection of a new Fed chair.  Congress’s attention to the Fed tends to be counter-cyclical, rising and falling with the state of the economy.  When the Senate first confirmed Bernanke as chair in 2006—with inflation and unemployment hovering at four percent—the vote was unanimous and unrecorded.  Four years later, the Fed’s unconventional boldness in monetary policy and its forays into credit allocation generated a record level of Senate opposition to confirming Bernanke for a second term.  Today, with both inflation and employment below the Fed’s targets but with pressures mounting for the Fed to unwind its unconventional policies, it matters who gets the nod as chair. Given the centrality of the Fed to the state of the economy (and the fiscal headwinds caused by recurring Congressional stalemate), the Fed has never been more politically central (and thus less independent) than it is today. No wonder the Summers camp is trying to make his nomination a fait accompli; no surprise the Yellen camp has reacted by demonstrating that her macroeconomic chops and central bank experience are second to none.

Second, the division of opinion between Summers and Yellen appears to rest largely within the Democratic party.  Republicans are generally watching from the sidelines.  Interestingly, only six Republican senators remain from the Senate that in 1994 confirmed Yellen by a vote of 94-6 to a term on the Fed’s Board of Governors.  Five GOP, including Mitch McConnell and John McCain, voted to confirm—as did Richard Shelby, then still a Democrat.  The remaining Republican, Chuck Grassley, voted against confirming Yellen.

In many ways, the debate between Yellen and Summers captures an historic Democratic divide between its Wall Street and more liberal, Main Street wings.  Summers’ defenders emphasize his personal relationship with Obama (including tennis and golf) and his economic brilliance, but also his experience in the world of finance (implying an inner hawk).  The Yellen camp points to her distinguished career as a central banker and her leadership within the Fed.  Senate liberals also clearly prefer Yellen for her dovish macroeconomic stance in a period they believe still demands a dovish central bank.  (Breaking the Fed’s glass ceiling? Icing on the cake for Yellen’s boosters.)  The divide between the Wall Street and Main Street wings of the Democratic party is an old one for the party, recurring most recently in contests over Dodd-Frank and in reactions to Bernanke’s leadership of the Fed.  (Senators on the far left were clearly more suspicious than their Democratic colleagues of the Fed’s largesse in bailing out failing financial institutions at the height of the financial crisis.) It is tempting to portray the horse race as a contest of personalities (which, of course, it is), but the contest also taps an enduring Democratic divide unlikely to be patched over the course of a campaign to lead the Fed.

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