Fed's Looming Leadership Change Adds to Investor Angst

This photo combo shows Fed Vice Chair Janet Yellen, left, and former Treasury Secretary Lawrence Summers. Fed Chairman Ben Bernanke is expected to step down when his second term ends in January 2014, and the contest to succeed him has turned into a public struggle between Yellen and Summers. (AP Photo/Eugene Hoshiko, J. Scott Applewhite)
Eugene Hoshiko, J. Scott Applewhite/APFederal Reserve Vice Chair Janet Yellen, left, and former Treasury Secretary Lawrence Summers.
By Jonathan Spicer

NEW YORK -- A new chairman is just the beginning of what could be a big leadership change at the Federal Reserve next year, giving investors yet another reason to second-guess the U.S. central bank's plan to scale back its support for the economy.

Up to six officials who would otherwise vote on monetary policy, or half of the central bank's voting ranks, could conceivably be gone in 2014, most of them by the end of January.

Five of those, including Chairman Ben Bernanke, sit on the Fed's seven-member Board of Governors, setting the stage for a whole new cast of characters to run the world's most influential central bank and giving President Barack Obama a chance to put a big stamp on it.

The face of the Fed could be even less familiar if Bernanke isn't succeeded by Vice Chair Janet Yellen, a policy dove who appears to be in a tight race for the top job with former Treasury Secretary Lawrence Summers, whose views are less known.


Wholesale changes could raise questions in the marketplace over verbal promises the Bernanke-led Fed has made to keep interest rates low in the years ahead. Still, analysts and Fed officials don't expect abrupt changes in the central bank's policy path, including its plan to end a massive bond-buying program by around mid-2014.

"All the forward guidance the Fed has put out in recent months and years is predicated on the leadership and the people being there," said Roberto Perli, a partner at research firm Cornerstone Macro and a former senior officer at the central bank.

"Having so many people changing I think is a source of additional uncertainty in the market."

The last thing the Fed wants to do is surprise investors.

In June, officials were startled when market rates shot higher after Bernanke said the central bank aimed to start trimming its $85-billion-per-month in bond purchases later this year.

Today's policy-making Federal Open Market Committee, made up of the seven board members, the head of the Federal Reserve Bank of New York and four other rotating regional Fed bank presidents, has also committed to keeping rates near zero at least until the unemployment rate falls to 6.5 percent, as long as inflation stays under control.

And in another pledge that would tie the hands of successors, Bernanke has said a "strong majority" of the FOMC don't expect to sell mortgage-based assets in the longer run.

But it is unclear whether the next generation of policymakers will conform to the promises made in the wake of the Great Recession, and some analysts say the uncertainty has already pushed bond yields higher.

Governors a Reflection of the Chief?

Bernanke is expected to step down when his second four-year term as chairman ends on Jan. 31. If Yellen doesn't get the job, economists expect her to leave when her term as vice chairman ends in October, even though her separate board term doesn't expire until 2024.

Governor Elizabeth Duke, who joined the Fed as the financial crisis worsened in 2008, is retiring at the end of this month, while Governor Sarah Raskin has been nominated to take a top post at the U.S. Treasury.

The term of Jerome Powell, a Republican who became a Fed governor last year, also expires at the end of January, although he could be reappointed by Obama.

Rounding out the six, Cleveland Fed President Sandra Pianalto, who becomes an FOMC voter in 2014, has said she will retire early next year.

The unusually heavy turnover means Obama could overhaul the central bank even more than former President George W. Bush did in 2006, when Bernanke replaced Alan Greenspan, two governors left, and three more arrived.

Obama is expected to name his Fed chairman nominee this fall. His picks for governors would likely come later and analysts said the new chairman would probably have a big say.

Past public comments suggest a Summers-led Fed might be somewhat quicker to raise interest rates and less likely to use extraordinary measures such as bond-buying in the future, than would a central bank led by Yellen.

While some are more influential than others on the direction of policy, Fed governors almost always back their chairman. But analysts say Summers' domineering personality could shake up the democratic and consensus-based FOMC that Bernanke built and that Yellen would likely continue.

"I would not be as focused on the change if Yellen came to get the job. It's a group that's been working together a long time," said Karim Basta, chief investment strategist at III Associates, a $2 billion hedge fund.

"But if that's not the case, with over one-third a new committee, with a new chairman, that does change things a lot."



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17 Comments

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setanta54s_back

whoa !

lOOming leadershi^ leads to ANGST

i won't shed a tear as they choke on their angst.

August 27 2013 at 10:47 AM Report abuse rate up rate down Reply
ccdae5

Get to cash now while you can!

August 25 2013 at 10:29 AM Report abuse +1 rate up rate down Reply
1 reply to ccdae5's comment
setanta54s_back

LOL as if THEY WOULD ket US have some ease and peace ?
they WILL continue THEIR inflationary road making the cash basically useless.
remember the stories of it taking a wheelbarrow full of paper money to get a lousey loaf of bread ?

so today in theUSA THEY have SNAP ! and their SNAP ! allowance might make it possible to get 1 loaf of bread and a quart of milk.

August 27 2013 at 10:50 AM Report abuse rate up rate down Reply
Michael

The Fed knows creating money out of thin air, and giving the banks free money is what has driven the stock market to the sky. The Fed knows if it doesn't stop, and these manipulations continue, there is only one possibility, collapse. But not to worry, Obama will put in place another stooge, who will expand QE 3, or 4, or whatever number we're on. We can't go on with fraudulent government numbers in growth, unemployment, and all the lies Obama has given us, market forces will eventually sort things out, but history shows us that frequently war, and totalitarian dictators rise out of such times. Possibly even here in the US, as we have been heading that way at break neck speed for 5 yrs.

August 25 2013 at 8:53 AM Report abuse +3 rate up rate down Reply
frank1946

Rates going Up !

Feds in a Panic, NO $$$ for Goodies and Freebies ?

Maybe.

August 25 2013 at 1:26 AM Report abuse +4 rate up rate down Reply
1 reply to frank1946's comment
ccdae5

Good!

August 25 2013 at 10:27 AM Report abuse +3 rate up rate down Reply
k4jlp

Jobs+a living wage=a booming economy. Everyone wins. Right now the only winners are big oil and big pharma, insurance companies and the MIC.

August 24 2013 at 10:44 PM Report abuse rate up rate down Reply
betty_brock

FIRE THE FED.

August 24 2013 at 10:06 PM Report abuse +5 rate up rate down Reply
photoguywm

Get ready for the world to stop using the US Petro Dollar as the world reserve.
The Fed Rats are already leaving the Ship Of State, and the rest of us to fend for ourselves.
The Fed left the banks high and dry in 1929 and instead took that money and financed foreign
investments and lined their own pockets and they will do it again. They have already ripped off
the 'Bail Out' taxpayer money and sent it to their International Investments. Get it folks.......
They do NOTHING FOR AMERICA EXCEPT STEAL your future. They will return with a new
plan to save us from despair.........Stop giving them permission to steal from us.

August 24 2013 at 9:06 PM Report abuse +5 rate up rate down Reply
Randolph

I wish companies would pay workers more, or lower the price of goods either way our top one percent in America needs to be a top 20 percent, which would lead to more investors, in the market. Either we as Americans get out in front in the Market or some other nation will. If we have more American investors, that would mean we would have more members at the big table stating AMERICA's position in the GLOBAL MARKET...Patriotism...And that 20 percent has to grow and continue to grow...

August 24 2013 at 7:21 PM Report abuse rate up rate down Reply
1 reply to Randolph's comment
betty_brock

The stuff from China (which is almost everything) is plenty cheap.

August 24 2013 at 8:21 PM Report abuse +3 rate up rate down Reply
Randolph

I wish companies would pay workers more, or lower the price of goods either way our top one percent in America needs to be a top 20 percent, which would lead to more investors, in the market. either we as Americans get out in front in the Market of another nation. If we have more American investors, that would mean we would have more members at the big table stating AMERICA's position in the GLOBAL MARKET...Patriotism...And that 20 percent has to grow and continue to grow...

August 24 2013 at 7:19 PM Report abuse rate up rate down Reply
Peter Martinez

Change and going forward is what they wanted. Spending in this country is out of control. This exodus would lead me to believe that these people were not happy with the status quo. I don't think they wanted their names affiliated with the Fed when the bubble bursts.

August 24 2013 at 3:17 PM Report abuse +2 rate up rate down Reply