Commentary Type

The New Fed Chair Should Not Be One of the Usual Suspects

Edwin M. Truman (Former PIIE)

Op-ed in the Financial Times


The unusual public debate about whom President Barack Obama should appoint as the next chair of the US Federal Reserve has focused on such issues as gender and the expertise as economists of the various aspirants to guide monetary policy. The former is irrelevant. The latter is less pertinent than usual because the Federal Open Market Committee has already set a course for the next few years.

A more relevant question is whether the Fed needs an outsider. The three said to be under consideration—Lawrence Summers, lately an adviser to Obama, Janet Yellen, current Fed vice-chair, and Donald Kohn, a former vice-chair—are all essentially highly competent insiders. But that is not enough to restore the Fed's credibility.

Under Ben Bernanke, the current chairman, the Fed has demonstrated enormous creativity, energy, and action in using its monetary policy tools to address the global financial crisis. But the new chair must convince a skeptical public and its Washington representatives that it has learnt from the crisis. The Fed has not conducted a public self-examination. It should. Where did its practices go off-track before the crisis? This work would need to be broad: Only a small portion of its staff of more than 20,000 is engaged in monetary policy. The Fed's mandate is much broader, covering not just monetary policy but also the stability of the US and global financial and payment systems. All of these issues—and the Fed's global role—should be reconsidered.

This examination must also resolve questions that emerged during the crisis about the Federal Reserve System. For example, what should be the respective roles of the Federal Reserve Board, each of the Reserve Banks, and the combined Federal Open Market Committee in discharging the Fed's responsibility for financial stability? These divisions may require restructuring the way the system operates.

A vigorous appraisal of its past mistakes is essential not only because of the depth of the financial crisis but also because of the Fed's recently augmented responsibilities for the supervision and regulation of the financial and payment systems. The Fed needs to reestablish its unquestioned accountability and reputation for all-round competence as the protector of stability. This will require a leader who is an agent for change, not someone who was heavily involved in past decisions.

Only six men have served as Fed chair since the Treasury-Federal Reserve accord of 1951, which liberated the Fed to run monetary policy independently of the need to finance federal debt at low cost. Some were agents of change. William McChesney Martin, the author of the accord, certainly was when he was appointed by Harry Truman in 1951. Arthur Burns, appointed by Richard Nixon, used his eight years to sweep away the cobwebs of 19 years of largely benign leadership by Martin. The much-maligned G.?William Miller was appointed by Jimmy Carter to succeed Burns. In his brief tenure, he introduced greater discipline into day-to-day operations.

Under Paul Volcker, Miller's successor, the Fed not only whipped inflation, it also took major steps in democratizing the system—for example, in the broadening representation on the boards of the Federal Reserve banks and in the transparency of financial operations.

Alan Greenspan, appointed by Ronald Reagan to succeed Volcker in 1987, stressed continuity as well as improved communication. In most respects, Bernanke, because he was an insider, was more of the same. The Fed has emphasized intellectual and analytical rigor as well as open debate, and shown a willingness to innovate—but in the context of institutional inertia.

The next chair of the Fed must be knowledgeable about monetary policy but need not be a monetary expert and need not be an academic. Only two post-accord Fed chairs have had academic credentials. What the United States and the world need is a Fed chair who will shake up the institution. They must be an effective manager as well as an intellectual leader who implements a transformation of the Fed as it enters its second century. That person is more likely to be a well-informed outsider than an entrenched insider.

Edwin M. Truman, senior fellow at the Peterson Institute, served as assistant secretary of the US Treasury for International Affairs from December 1998 to January 2001 and returned as counselor to the secretary March–May 2009. He directed the Division of International Finance of the Board of Governors of the Federal Reserve System from 1977 to 1998.

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