President Barack Obama will likely nominate Janet Yellen soon as the next chairman of the Federal Reserve. Yellen, the current vice chairman of the central bank, should enjoy uniform Democratic support and will almost certainly pick up enough Republican votes to win confirmation, according to Hill aides and political operatives on both sides.
Then her real problems will begin.
Yellen, should she get the job, would take over at a uniquely difficult time for the nation’s central bank. Since the financial crisis, the Fed has been among the few constant sources of economic stewardship in Washington, pumping money into the struggling economy as Congress and the White House lurched from near-default to the first credit downgrade in the nation’s history to a series of high-stakes spending battles.
(Also on POLITICO: Liberal wrath doomed Summers)
The familiar cycle of dysfunction is now repeating itself as Washington hurtles toward a possible government shutdown and a fresh debt ceiling crisis. And this time the Fed has credibility problems of its own.
Over the summer, outgoing Chairman Ben Bernanke told investors to expect the central bank to soon begin winding down its unprecedented program of printing money to boost the economy. Investors responded by driving up interest rates, expecting the Fed to announce that the so-called “taper” of asset purchases would begin in September.
Then last week the Fed did the exact opposite, saying it would keep pumping in cash. Bernanke cited the very financial conditions he himself created over the summer as a reason to delay the taper. Investors were left to wonder whether they could still believe the Fed’s guidance.
(Also on POLITICO: Source: White House pushing Yellen nod)
“I think they did undermine their credibility. They confused people. Now we don’t know how to read the tea leaves and the signals, and that’s a real problem,” said Jerry Webman, chief economist at OppenheimerFunds in New York. “Forward guidance, as Chairman Bernanke said, is one of the Fed’s two main policy tools and maybe the most effective one. But now, who is going to believe the forward guidance?”
It will now be up to Yellen — assuming she gets the job — to both clean up the Fed’s communications mess and figure out how and when to draw down the stimulus as growth stays sluggish, unemployment remains over 7 percent and inflation runs below the central bank’s 2 percent target.
The Bernanke Fed in its final months may begin the process of cutting down on asset purchases, perhaps in December. This could leave Yellen, who has expressed grave concerns about the level of persistent unemployment, in the awkward position of trying to convince fellow Fed governors to reverse Bernanke’s position.
(WATCH: Bernanke: ‘I don’t have anything for you on my personal plans’)
And she would have to do so with the clear knowledge — both on her part and among fellow governors — that she was the president’s second choice. Larry Summers, the former Treasury secretary and favored White House candidate, withdrew from consideration after drawing opposition from several Democrats on the Senate Banking Committee, which must first approve any Fed nominee.
“It’s worse than that,” said James Pethokoukis of the American Enterprise Institute, noting the brief White House flirtation with the idea that former Treasury Secretary Timothy Geithner could return as Fed chair. “Yellen may have been third choice after Geithner and Summers. But her influence will depend far less on her Obama short-list ranking than her ability as Fed chair to reach consensus among Fed policymakers, clearly and persuasively communicate Fed policy and show independence from Congress and the White House.”
Market analysts do not doubt Yellen’s ability to lead the Fed under all of these circumstances. But they also note that they would be far from ideal conditions for anyone to take over at the central bank.
For Yellen, nomination may be the easy part
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