Next year, the Federal Reserve is in for an unusually high number of leadership transitions. Given the importance of the Fed and FOMC to the US economy and global markets, it’s up to President Obama to manage this transition without incident. While he is widely expected to appoint Lawrence Summers as chairman, he might give vice chair Janet Yellen a serious second look. She has the support of dozens of top economists, including Alan Blinder, Christina Romer, Jeffrey Sachs, Joseph Stiglitz, and Laura Tyson. In an open letter to the president, they note the following:
Dr. Yellen is superbly qualified. She has shown consistently good judgment in all her roles leading our nation’s financial institutions and economic policy, first as a member of the Board of Governors of the Federal Reserve System (FRB), then as Chair of the Council of Economic Advisers under President Clinton, President of the Federal Reserve Bank of San Francisco, and now as Vice Chair of the FRB. While leading the San Francisco Federal Reserve Bank in 2005, she warned of an impending real estate meltdown as asset prices rose unrealistically. Dr. Yellen was one of the first members of the Federal Open Market Committee to realize that the financial sector’s difficulties in 2007 could cause a major recession, and she worked to focus her colleagues on the problems of the housing sector. Her knowledge of how the Fed sets policy, her understanding of the relationship between monetary policy and economic growth, and her ability to see and propose solutions to emerging economic problems is second to none.
Lawrence Summers is undeniably brilliant and experienced, but he can also be volatile. Janet Yellen is anything but volatile. She has a wealth of experience as a central banker that Summers does not have, giving her an edge with building policy consensus during a complex period in the nation’s recovery.