Will Fischer Cramp Yellens Style at the Fed?

Jeffrey Shafer, who helped recruit Fischer to Citigroup (C) last decade, said he doesn’t believe appointing Fischer “undercuts the choice” of Yellen at all.

“I’m sure they would not have done this without her blessing. I think it says something about Janet that she is comfortable with someone on her team with his eminence. I think they will get along and make a very good team,” said Shafer, who previously worked at the Fed and the Treasury Department.

From a philosophical perspective, Fischer and Yellen have far more to agree on than not.

They have both been supporters of the Fed’s controversial $85 billion bond buying exercise and super low interest rates. In fact, Fischer oversaw a QE program of his own at the Bank of Israel.

“We see little daylight between Fischer and the current core FOMC leadership with respect to their basic paradigm for thinking about the economy,” Goldman Sachs (GS) economists Jon Hatzius and Kris Dawsey wrote in a note to clients this week.

While Fischer is skeptical about calendar-based forward guidance, Yellen has been one of its biggest proponents. As the Fed begins to dial back QE, it is expected to lean heavily on forward guidance, which indicates the expected path of monetary policy in the future.

Still, this isn’t seen as a major stumbling block for the likely new Fed leadership.

“We have little doubt that Yellen and Fischer would see eye to eye on the need to prevent a large tightening of financial conditions anytime soon, so the slightly greater uncertainty that might result from his nomination is mainly about tactics, not strategy,” Hatzius and Dawsey wrote.

 

Wilbur Ross: Janet Yellen will be slow to make changes

I PERSONALLY DO NOT THINK THAT JANET YELLEN IS GOING TO DO ANYTHING VERY PRECIPITOUS.

I THINK SHE WILL BE SLOW TO MAKE CHANGES AND WHEN SHE DOES I WOULD WAGER THAT THEY WOULD BE VERY, VERY GRADUAL.

MAYBE SOMETHING AS GRADUAL AS CUTTING IT BACK FROM THE CURRENT 85 BILLION A MONTH BY PERHAPS FIVE BILLION A MONTH OVER A 17-MONTH PERIOD WHICH SHOULD BE A VERY, VERY GRADUAL EASING OF THING.

 

The enigma of Janet Yellen as Fed chair

Yellen’s confirmation will warm the chilly heart of Wall Street, which fears “tapering” — slowing the $85 billion per month pace of buying bonds, a.k.a. printing money — even more than it seemed to fear the possibility of a default. She probably will continue, perhaps even longer than the departing Ben Bernanke would, the “quantitative easing” that is “trickle-down economics” as practiced by progressives:

Very low interest rates drive investors into equities in search of higher yields. This supposedly produces a “wealth effect” whereby the 10?percent of Americans who own about 80?percent of stocks will feel flush enough to spend and invest, causing prosperity to trickle down to the other 90?percent. The fact that the recovery, now in its fifth year, is still limping in spite of quantitative easing is, of course, considered proof of the need for more such medicine.

Easing serves two Obama goals. It enables the growth of government by deferring its costs with cheap borrowing. And it redistributes wealth: By punishing savers, it effectively transfers wealth from them to borrowers.

Although Yellen’s convictions are honestly convenient for the current administration, members of the Senate Banking Committee should question her about what she considers appropriate — and inappropriate — relations between a Fed chair and government’s political officers. The senators should read “Inside the Nixon Administration: The Secret Diary of Arthur Burns, 1969-1974,” and “How Richard Nixon Pressured Arthur Burns: Evidence from the Nixon Tapes,” by Burton A. Abrams in the Journal of Economic Perspectives (Fall 2006).

Various of Burns’s diary entries begin “President called and asked me to come over,” “The meeting at Camp David,” “President telephoned.” Although the Fed chairman insisted “there was never the slightest conflict between my doing what was right for the economy and my doing what served the political interests of RN,” RN took no chances. His speechwriter William Safire, in his memoir “Before the Fall,” recounts that Nixon planted negative media stories about Burns — e.g., saying Burns was requesting a large pay increase, whereas he actually suggested a pay cut — and threatened to weaken him by expanding the Fed’s Board of Governors.

There is no reason to doubt Yellen’s intellectual integrity; there is reason to wonder where she thinks the autonomous Fed now fits in the government. The Fed seems to be evolving into a central economic planner with a roving commission to right social wrongs such as unemployment. About this Yellen talks with a humane passion that speaks well of her but is more suited to a political official.

There is considerable congruence between Yellen’s economic theories and the policy preferences of the Democratic liberals who secured her nomination. They probably favor quantitative easing forever and consider themselves her constituents. Is she prepared to disappoint them.

Senate Banking approves Janet Yellen nomination - Politico

“Dr. Yellen is a model candidate for chair of the Fed,” Senate Banking Committee Chairman Tim Johnson (D-S.D.) said. “She has devoted a large portion of her professional and academic career to studying the labor market, unemployment, monetary policy and the economy.”

Republicans have used Yellen’s nomination to bash the Fed’s easy money policies, in particular, its program to buy $85 billion a month in Treasury and mortgage bonds to keep long-term interest rates low.

”The long-term costs of these policies are unclear and frankly worrisome,” said Sen. Mike Crapo of Idaho, the panel’s top Republican. “The immediate benefits are questionable and markets have become far too reliant on monetary stimulus.”

Yellen had been expected to win enough Republican support to get the needed 60 votes, but that issue become moot on Thursday when the Senate voted to change chamber rules so that now only a simple majority will be needed to confirm presidential nominees.

Yellen “understands that the Fed should be playing an active role in supervising and regulating the largest financial institutions, and that the Fed’s supervisory responsibilities are just as important as its monetary policy responsibilities,” said Sen. Elizabeth Warren (D-Mass.).