Bernanke Stimulus Exit May Be Aided by Yellen, Raskin (Update1)
March 13, 2010, 12:24 PM EST(Adds comment in 16th paragraph)
By Steve Matthews
March 13 (Bloomberg) -- President Barack Obama’s likely nomination of three Federal Reserve governors will help Chairman Ben S. Bernanke plan an exit from record monetary stimulus and strengthen banking supervision and consumer protection.
Janet Yellen, an economist who heads the Fed Bank of San Francisco, is Obama’s choice for central bank vice chairman in Washington. The administration has also approached Sarah Bloom Raskin, Maryland’s commissioner of financial regulation, and Peter Diamond, an economics professor at the Massachusetts Institute of Technology, to fill two vacancies on the Board of Governors.
The appointments would complete the Federal Reserve’s seven-member board for the first time since April 2006. Yellen, former chief economist under President Bill Clinton, and Diamond could help Bernanke determine when to raise interest rates from record lows, while Raskin brings expertise in regulatory issues.
“Does Bernanke need help in navigating the exit strategy? He sure does,” said former Fed Governor Lyle Gramley, senior economic adviser at Potomac Research Group in Washington. “The board has a lot of work to do in a variety of areas, even under normal circumstances.”
Yellen, 63, would replace Donald Kohn, who will retire at the end of his term in June after 40 years at the Fed. His departure would leave Bernanke, a former Princeton University professor, as the only economist on the board.
Growing Workload
“It was absolutely critical that the vacancies be filled,” said New York University economist Mark Gertler, who co-wrote research with Bernanke. “Its workload now is higher than it has ever been in the postwar, given that it must now deal with the vexing issue of financial-market regulation and also the winding down of its balance sheet.”
Fed governors are responsible for setting monetary policy as voting members of the Federal Open Market Committee, along with the president of the New York Fed. The other 11 Fed bank presidents rotate as voting members.
The Fed has already wound down many of the emergency programs it set up to battle the financial crisis, and it plans to complete purchases of $1.25 trillion of mortgage-backed securities this month.
Balance Sheet
Fed officials are now debating how and when to shrink the central bank’s $2.29 trillion balance sheet. Some policy makers pushed to start selling assets in the “near future,” according to minutes of their Jan. 26-27 meeting.
Yellen said last month that the U.S. “still needs the support of extraordinarily low” interest rates.
Yellen spent most of her career teaching economics and researching labor markets, joining the University of California at Berkeley in 1980. She and her husband, George Akerlof, a Nobel Prize-winning economist, have written more than a dozen papers that included studies on unemployment, wages, street gangs and out-of-wedlock births.
In 1994, Clinton appointed Yellen to be a Fed governor in Washington, serving until 1997, when the president moved her to the White House to chair the Council of Economic Advisers. She left the position in 1999 to return to Berkeley.
Yellen rejoined the Fed in 2004 as president of its San Francisco district bank, which represents the largest region by area and economic output. She has always voted with the majority of policy makers on interest-rate decisions.
Consumer Protection
Raskin, chair of the Legislative Committee of the Conference of State Bank Supervisors, said she viewed the role of state regulators as “the first-line of protection for consumers” in congressional testimony last June.
“A pick like Sarah Raskin is particularly thoughtful,” said Eugene Ludwig, chief executive officer at Promontory Financial Group and former Comptroller of the Currency, in an interview. “It enhances the supervisory talent and credibility that the Fed has. She is someone who knows and cares about consumer issues, and is a serious and thoughtful person on prudential supervision as well.”
U.S. senators are considering creating a new consumer protection agency within the Fed. Representative Barney Frank, chairman of the House Financial Services Committee, called a Senate plan “a joke” because he said the Fed has failed to protect consumers in the past.
Revamping Supervisory Approach
Federal Reserve Governor Daniel Tarullo and Bernanke are revamping the central bank’s approach to supervision, even as the Senate considers proposals to limit or remove the Fed’s oversight powers.
Diamond, a specialist in taxation and behavioral economics, has written on overhauling entitlement programs. His 2003 book “Saving Social Security” was co-written with Peter Orszag, director of the Office of Management and Budget.
“I definitely think this trio helps on both fronts,” monetary policy and supervision, said Alan Blinder, a Princeton University economist and former Fed vice chairman.
--Editors: Christopher Wellisz, Mark Rohner
To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
