Ed Lotterman: At the Fed, a pragmatist follows a pragmatist

February 7, 2014 

Continuity rather than change is the theme at the Federal Reserve this week. In the short term, its policy-making Open Market Committee decided to continue gradually reducing its long-established stimulus program of expanding the nation’s money supply through bond purchases. This is exactly what it said it would do and what nearly every informed observer expected.

For the somewhat longer run, Feb. 1 marks the changing of the guard at the Fed’s Board of Governors. For the first time in eight years, Ben Bernanke will have no responsibility for shepherding the U.S. monetary system. The chair instead is now occupied by Janet Yellen. But this represents precious little change.

Bernanke is a Republican first appointed by then President George W. Bush, also a Republican. Yellen is a Democrat who was first named to the Fed board by President Bill Clinton two decades ago. But neither Bernanke nor Yellen is far from the political center. Within the discipline of economics, Yellen might be considered a bit more liberal than Bernanke on some questions, but both are pragmatic Keynesians who fall well within the mainstream.

In terms of managing the money supply, Yellen is perceived by many as more dovish, or prone to err on the side of keeping liquidity high and interest rates low, compared with some other possible appointees to the job. But it is not clear that she is much further out on this axis than her predecessor. Both are cautious, nonideological and collegial. Again, this is a transition marked by continuity rather than change.

Barring some crisis elsewhere in the world or hidden rot in the U.S. financial system, odds are the economy will continue to strengthen slowly and the Fed gradually will wind down its unprecedented injections of liquidity.

With Bernanke’s return to other opportunities in the private sector, probably as an ordinary professor back at Princeton University, pundits are evaluating his tenure. This probably is premature. Many things have to play out yet.

It certainly is clear that his eight years were the most challenging faced by any chairman of the Fed. Arthur Burns, who presided during the 1970s, faced the combination of slow growth and high inflation that was of the Fed’s own making. But there was little chance that the nation’s entire financial system could collapse, pushing our country into another depression. Paul Volcker faced high inflation, but it was clear how that could be addressed, even though the solution involved pain. A recession was a certainty, but a financial meltdown or full-blown depression was not in the cards.

That wasn’t true for Bernanke. By the time he had occupied the chair for two years, we stood on the edge of an economic abyss. Many people remain unconvinced, and there is no way of proving it was true. But I think future economic historians will confirm the degree of peril.

The old adage “cometh the hour, cometh the man,” doesn’t always pan out. But in 2008-2012, it did prove true. Bernanke was a highly respected scholar of monetary history, but not someone who was on everyone's short list for an eventual Nobel. But as a student of the Great Depression and analyst of Japan’s economic travails post-1989, Bernanke was unsurpassed.

What about Yellen?

Time magazine features her on its cover, asserting that “the U.S. economy is now in her hands.” This is dangerous nonsense. A well-administered central bank is vital to any modern economy. It can provide the price stability that underpins long-term economic growth in terms of keeping inflation in check and warding off deflation. It can be vital in warding off financial crises or economic collapse, and it can provide some boost to output and employment when an economy is in deep recession.

Beyond that, however, a central bank has much less power or control than some — evidently including Time’s editors — fantasize. And an individual Fed chair has much less power over that institution’s policies than is commonly believed. Yes, Bernanke or Alan Greenspan or Volcker were all more than just “first among equals” on the Open Market Committee. Yes, the other 11 voting members at any meeting traditionally give much deference to the chair’s views. But they only do so as long as the chair’s views fall pretty much within the range of thought of the rest of the committee.

The policies the Fed has followed over the past eight years did not have unanimous support, either among the governors themselves or among the 12 Fed district bank presidents who participate in all meetings and, in rotation, vote on policy decisions. But these policies did have broad support from most of them, all highly educated and experienced people who Bernanke could neither hire nor fire.

Yellen cannot boss the Open Market Committee any more than Bernanke could, and the Fed has no greater effective power to control the economy under her leadership than it did before. She has more direct Fed experience than any previous chairman and has the intellect and temperament for the job. But just as for other predecessors, she has to bring most of 11 other people along on key decisions.

There still are dangers, domestic and foreign, many landmines that could explode.

Hope for the best, however. Bernanke made mistakes and so will Yellen. But Bernanke came out remarkably well, at least for the period after March 2008, and Yellen will likely do as well. Both are experienced and knowledgeable pragmatists, and that sure beats having an ideologue at the head of our central bank.

Economist Edward Lotterman teaches and writes in St. Paul, Minn. Write him at ed@edlotterman.com.

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