Musical Fed Chairs: Yelling for Yellen or Fine with Ferguson?

James DiGeorgia

With Larry Summers out of the race, Wall Street expects Janet Yellen will take the Fed chair … but President Obama has other choices. Could he surprise us with someone else?

If he does, Roger Ferguson is a strong possibility. In fact, I feel almost certain one of these two will get the job — and I’ll be happy either way.

As I’ve said, we have some major turmoil ahead. The federal budget and debt ceiling storms are not going away.

The next Fed chair will literally change history, defining a new economic era. I’m optimistic good times are ahead under Yellen or Ferguson. Let me tell you why.

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Cool-Hand Janet

Janet Yellen’s enormous amount of support among Senate Democrats should seal the deal for her to succeed Ben Bernanke as Federal Reserve chief.

Yellen is a well-qualified and experienced woman positioned perfectly to break the glass ceiling at the Federal Reserve. She’s held a variety of high-profile economic positions. She served as a Federal Reserve governor from 1994 to 1997, then ran President Clinton’s Council of Economic Advisers from 1997 to 1999.

Fed royalty: Ben Bernanke and Janet Yellen

She next taught at Harvard and the London School of Economics and became a board member at Yale.

In June 2004, Yellen took over as president of the San Francisco Federal Reserve Bank. She represented her district on the Federal Open Market Committee, which sets monetary policy.

In 2010, Yellen became the Fed’s vice chair — second only to Ben Bernanke himself. The Senate Banking Committee confirmed her with a bipartisan 17-6 vote back then. Will Republicans try to stop her ascent? Maybe — but it wouldn’t help their already-serious problem with women voters.

Yellen earned friends on both sides of the aisle with her vocal concern for unemployment. Back in 1999, she said …

"Will capitalist economies operate at full employment in the absence of routine intervention? Certainly not … Are deviations from full employment a social problem? Obviously."

In a 2004 paper, Yellen wrote…

"Policy-makers should be compelled to take action given the serious costs of long-term unemployment when overall unemployment is already high. A week of unemployment is worse when it is experienced as part of a longer spell.

Now that we’re in the slowest labor-market recovery since World War II, those weeks are turning into months and years for an increasing number of un- and underemployed individuals.

Yellen was far ahead of other economists and Fed officials about the approaching 2008-’09 financial crises. In December 2007, when others stayed optimistic despite the clear signals trouble was brewing in the subprime-mortgage market, Yellen said …

"The possibilities of a credit crunch [and] recession seem all too real."

As we now know, she was 100% on-target. The recession officially began that very month.

Janet Yellen foresaw the housing bubble, too. She warned about the impending disaster way back in 2005 …

"Certainly, analyses do indicate that house prices are abnormally high — that there is a ‘bubble’ element, even accounting for factors that would support high house prices, such as low mortgage interest rates."

Janet Yellen has one potential Achilles’ heel: a terrible relationship with Obama’s chief economic adviser, Gene Sperling. The rift between the two economists began when both served in the Clinton administration.

Will this derail her nomination? I doubt it, but the next best bet is Roger Ferguson.

Ferguson: Yellen’s biggest competition for Fed chief?

Roger Ferguson: Bernanke-Squared!

Most people, even those who follow the economic news, have never heard of Roger Ferguson. Don’t let that fool you. Ferguson is a heavyweight.

He’s a natural for Obama. Consider his background starting with his education …

  • B.A. in Economics, Harvard, 1973
  • Fellowship at Pembroke College, Cambridge University, 1973-’74
  • J.D., Harvard Law, 1979
  • Ph.D. in Economics, Harvard, 1981

Like Yellen, Ferguson served as a Federal Reserve Board member and vice chair. He is currently president and CEO of TIAA-CREF, the behemoth pension fund. Ferguson has the policy-making experience a Fed chair needs.

Ferguson is a close colleague of Ben Bernanke. They share the belief that a determined central bank can boost the economy even in a "liquidity trap" with zero interest rates. He supported QE2 back in 2010 despite intense criticism.

As far back as 2003, Ferguson talked about the same unconventional policies Ben Bernanke later employed. Many have called his speeches "Bernanke-ian."

Speaking that year about Japan’s "lost decade" and the danger of deflation, Ferguson said in such situations …

"Central banks could buy longer-term bonds to push down longer-term borrowing costs. Or they could promise to keep short-term rates at zero for a long time."

This is exactly what the Bernanke Fed ended up doing. Economists call these policies "quantitative easing" and "forward guidance."

When Ferguson said this in 2003, the U.S. economy was still reeling from the technology crash and 9/11. The economy was stuck in a jobless recovery, with rising unemployment even as inflation and interest rates dropped uncomfortably close to zero.

Wary of repeating Japan’s mistakes, Ferguson said this in a 2003 Fed policy meeting:

"I accept the fact that the interactions between pure quantitative easing and the outcome with respect to the real economy are potentially uncertain, but that ties back to the need to communicate clearly.

"So I conclude, as Governor Bernanke did, that we really are thinking about here is a package of quantitative operations and communications. Though my comments are divided into what to say and what to do, the reality is that they work in tandem. Therefore, I believe we ought to be thinking about using both of those tools simultaneously."

Bottom line: Ferguson wanted the Fed to do exactly what it has done. His monetary policy, if he should be nominated and confirmed, would be very much like Ben Bernanke’s.

Ferguson would keep rates low until the recovery was back on track. The Federal Reserve would buy bonds when necessary and then taper its bond-buying very slowly with an eye on the core inflation rate.

As I said, Janet Yellen has an Achilles’ heel. Ferguson also has a potential problem: his record as a regulator.

Ferguson was in charge of the Fed’s bank supervision during the bubble years — and that didn’t exactly go well. The next Fed chair will enforce the new Dodd-Frank rules. This is why Senate Democrats want a strong regulator as Fed chair.

Obama’s choice may boil down to these two names. Personally, I’m yelling for Yellen — but I’d be fine with Ferguson.

Good luck and best wishes,


P.S. Before last week’s Fed shocker that it wouldn’t taper QE this month, my trading partner Geoff Garbacz and I told our subscribers:

"The market seems to believe some form of the taper will begin. However, the recent (last two months) economic data is mixed and not conclusive that a taper should begin now. Even though logic is that the taper begins, our gut says it may not be now and rather the Federal Reserve begins to taper in December."

We’re no strangers to making unpopular calls. In fact, everyone said I was crazy when I called $1,000 gold and $100 oil back in the early 2000s. I think you can agree the results speak for themselves.

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