With President Obama’s belated decision to name Janet Yellen to chair the Fed, several questions arise.
First, is Yellen likely to be confirmed? Almost certainly. The Republicans have lost a lot of public support by shutting down the government and playing chicken with the debt ceiling. They are not likely to trifle with the one functioning branch of government. Despite the Republicans’ intermittent uses of the filibuster, I’d be surprised if they went to the barricades to block Yellen.
Second, there is the question of whether Yellen will have the same working majority on the Fed’s board of governors and open market committee that Ben Bernanke has enjoyed. There are now three vacancies on the Fed. One will be filled by Treasury Undersecretary for International Affairs, Lael Brainard, a woman who is close to both Larry Summers but also to Dan Tarullo, the progressive Fed governor responsible for banking regulation at the Fed.
However, the shift of Fed Governor Sarah Bloom Raskin to be Deputy Treasury Secretary and Brainard to the Fed leaves the Fed on balance slightly more conservative. And the pro-Wall Street faction at the Treasury that haplessly promoted Larry Summers for the top Fed job will recommend two more spots for President Obama to fill.
One of these will have to be a Republican. As it happens, Main Street Republicans have often been better at restraining excesses of mega-banks than Wall Street Democrats. Exhibit A is the former FDIC Chair, Sheila Bair, a holdover Republican appointee who was far tougher in reining in financial excesses during Obama’s first term than most of Obama’s own appointees.
Yellen, a respected leader and consensus builder, begins with a great deal of collegial good will. Even so, using the Fed to damp down abuses of the banking system and to continue the Fed’s aggressive use of monetary policy to compensate for the foolish fiscal austerity will require great skill on Yellen’s part. The long rumored end to “Quantitative Easing”—keeping interest rates close to zero—reflected an erosion within the Fed of support for these policies and a worry about inflation (which Yellen considers largely groundless).
Finally, how does the Yellen appointment impact other major battles currently enveloping Washington and the country?
Naming Yellen gives Obama a brief opportunity to change the subject from the contrived shutdown crisis, and to show some leadership. In this case, he did the right thing as a last resort, when other options were politically closed.