Fed to See More Change Next Year Than Just a New Chief

No matter who winds up heading the Federal Reserve, the nation's central bank will see some big changes -- and even bigger challenges -- next year.

Janet Yellen, Vice Chairwoman of the Board of Governors of the Federal Reserve
Sandy Huffaker/Bloomberg via Getty ImagesJanet Yellen, vice chairwoman of the Federal Reserve's board of governors.
By Jerome Idaszak

Look beyond the battle to succeed Ben Bernanke as chairman of the Federal Reserve. Front-runner Janet Yellen, vice chairman for the past three years, comes well qualified, but she faces challenges no chairman has ever faced.

Just ahead is a rare wave of new faces joining the policy-setting Federal Open Market Committee, which consists of the seven governors and the presidents of the 12 regional Federal Reserve banks. The voting members of the FOMC include, in addition to the chairman and vice chairman, the five other governors and five of the regional bank presidents -- the president of the New York Fed and four others who rotate into voting positions each year.

One of those governors' spots is vacant now. Another might as well be: Sarah Raskin skipped the recent meeting in light of her pending departure to take a top spot at the Treasury Department. Bernanke will leave by Jan. 31. Two others are likely to exit in 2014: Jerome Powell, whose term expires at the end of January, and Jeremy Stein, who will return to his tenured professorship at Harvard by late May. Including the four rotating regional bank president slots, that means nine new faces among the 12 voting members next year -- or 10, if Yellen doesn't get the nod as chairman and departs.

Historically, the governors fall in line behind the chairman. They're usually picked on the basis of expertise in bank regulatory issues, consumer credit policies or other technical work that the Fed carries out. But they cast votes on monetary policy, and their allegiance to the chairman can't be taken for granted and will be closely watched over the next few months. Regional bank presidents more frequently break ranks and question the chairman's direction.

All this new blood will make it harder for financial markets to gauge the effectiveness of the new chairman's leadership, adding volatility to long-term interest rates. And until the newcomers settle in, rates are likely to be a bit higher than they otherwise would have been.

That matters. Although the bond market moves in small increments, just a quarter-point increase in interest rates can add thousands to the cost of a home buyer's mortgage and hundreds of thousands to the price of financing a business merger or acquisition.

Recent history clearly demonstrates the sensitivity of financial markets to uncertainty about the Federal Reserve's direction. The 10-year Treasury yield has nearly doubled since spring, rising from 1.6 percent then to nearly 3 percent now. Much of the increase came after an FOMC statement last June. Financial markets interpreted it to mean that Bernanke and company were signaling a sooner-than-expected boost in the federal funds rate. The stock market took a tumble, and interest rates rose in Europe as well as in the U.S. Bernanke hastened to make clear that no such signal was intended, and volatility eased. But the increase in rates hasn't reversed.

The markets want to see where a new chairman will lead the FOMC and whether dissent emerges. Some new FOMC members will want the central bank to focus more on the goal of holding inflation in check, arguing that even though prices are not surging now, the Fed is drifting off course. That sets the stage for a clash with Yellen, who thinks the focus should be on the other half of the Federal Reserve's two-pronged mission: managing -- in this case, reducing -- unemployment.

More from Kiplinger:

Increase your money and finance knowledge from home

Intro to different retirement accounts

What does it mean to have a 401(k)? IRA?

View Course »

Understanding Credit Scores

Credit scores matter -- learn how to improve your score.

View Course »

Add a Comment

*0 / 3000 Character Maximum


Filter by:

Bill Bonner for Fed chief!

September 23 2013 at 8:47 AM Report abuse rate up rate down Reply

yoo.fomo. you have once again proven the republicans cannot think for themselves. On social security and medicare, thank a democrat. Want to get ride of these 2 fine programs vote republican and save all the money you can.

September 23 2013 at 4:23 AM Report abuse -1 rate up rate down Reply

You republicans must remember, Ben is a bush jr. appointee. Now the democrats will get a chance to clean up the federal reserve. Bush jr. was a tax cut and spend president and his appointee is one too. We have to get ride of the party of NO, yup, the GOP.

September 23 2013 at 4:21 AM Report abuse rate up rate down Reply
1 reply to toosmart4u's comment

The democrat ran Fannie Mae did a lot of damage.

September 23 2013 at 9:22 AM Report abuse -1 rate up rate down Reply

The FED is a private foreign owned company that does not care about the American people.
Every asset in the USA is pledged to the FED for our loans with them, we could never pay them back in 100 years.
We could just print money with NO debt, but the FED likes when we pay them interest for printing our money for us..
They own America and we are Debtors in possession.
They will come for your house, with fully armed police! SWAT if needed.
They own us!

September 23 2013 at 2:47 AM Report abuse +2 rate up rate down Reply

She will only continue what has not been working, for the working class of this country........only the wealthy Bankers & Wall Streeters

Harris Glasser

September 22 2013 at 10:23 PM Report abuse rate up rate down Reply

And she is a member of the tribe, so she's a shoo in.

September 22 2013 at 7:32 PM Report abuse rate up rate down Reply

We need to support our own manufacturing and partially close the doors to China. The market is no more than what what people do on a daily basis..and you can't trust most of them.

Jobs went overseas to increase that profit margin to have it divided up amongst those in control. CEOs did become crooks and most of the older ones all need to be removed. The middle class needs to be rebuilt and the number 1 proirity

September 22 2013 at 4:07 PM Report abuse +6 rate up rate down Reply
2 replies to SPQR's comment

.Jobs left more so because of a lack of graduates in math and hard sciences coupled with green regulations that 99% of the time help nothing but increase costs

September 22 2013 at 5:25 PM Report abuse rate up rate down Reply

Obama`s ideology hasn`t helped any. Has America ever had such a mystery man for president ?

September 23 2013 at 9:25 AM Report abuse -1 rate up rate down Reply

My problem with the FED is although they are smart, brilliant and very successful they did not anticipate the financial problems we find ourselves in today. I do believe if they had paid attention to developing madness within the financial institutions of some years ago we wouldn't be where we are today or maybe they were benefitting so much they really didn't care?

September 22 2013 at 1:50 PM Report abuse +1 rate up rate down Reply

Mike Bloomberg, if they could get him, smart man, knows economics extremely well, would be a great canidate for this position.

September 22 2013 at 11:30 AM Report abuse -2 rate up rate down Reply