America’s dysfunctional politics might just preserve the central bank’s independence – if inadvertently. President Barack Obama’s pick as the next chairman of the Federal Reserve, Larry Summers, was torpedoed by congressional opposition. That suggests an unwelcome increase of political meddling in the Fed’s affairs. But if the Fed’s internal choice, Janet Yellen, gets the job, isn’t the central bank’s sovereignty maintained? It’s a messy way to the right outcome.
Throughout early 2013, the market had pretty much assumed that the president would nominate the current vice chair, Yellen, to take over for Chairman Ben Bernanke when his second four-year term comes to a close in January. Instead, the White House shocked almost everybody in early summer when officials floated the name of Obama’s former economic advisor, Summers, instead.
The move actually followed a pattern set by the president’s other nominations. As with current Treasury Secretary Jack Lew, the president knows Summers well and trusts him. He may have naturally wanted someone ruling the Fed who had his back. Though it is the president’s prerogative to choose the Fed chairman, Obama’s choice smacked of cronyism.
That, combined with the former Treasury secretary’s history of backing deregulation, his work on Wall Street and tempestuous tenure as Harvard University’s president was sufficient for lawmakers in the president’s own party to take steps to block the nomination. They instead backed Yellen, who is now the front-runner after Summers took himself out of the race.
So it would be easy to conclude that, should Yellen get the nod, congressional politics will have determined the leadership of the most important central bank in the world like never before in history. Fed independence, it might be said, was therefore dead.
Not so fast. Obama’s pick was worrisome in part because of his strong ties to the president. By contrast, Yellen is a Fed insider with limited connections to the current political establishment. That’s not why Democrats on the Hill plumped for her over Summers. But it may turn out to be the best thing about her likely confirmation, maintaining Fed independence.