Whoever chairs the Federal Reserve next year will have to decide a lot more than how to handle the economy. She or he will have to decide whether to talk in English or Fed-speak.
Ben Bernanke is scheduled to step down as the Fed chief when his term ends Jan. 31. If he’s replaced – there’s some speculation that he might be tapped for another term – his successor will have to decide whether to adopt the style of former Chairman Alan Greenspan, a top-down leader whose deliberate avoidance of clarity gave rise to the term Fed-speak, or the professorial Bernanke, who promoted a more deliberative body, sought consensus, spoke more clearly and allowed the country to hear dissenting voices from within the central bank.
“He’s a chairman who shows enormous energy with respect to building a consensus and is, in the end, somewhat more flexible than the previous chairman in terms of meeting-to-meeting decisions,” said Laurence H. Meyer, a vice chairman under Greenspan who credits Bernanke, who now holds regular news conferences, with modernizing the Fed. “There is active, actual deliberation. People actually talk with each other. They can get testy with each other. Everybody likes to be able to put their views on the table and defend them.”
Previously, Greenspan went first in the conversation and essentially set the tone for what would happen. Bernanke goes last in the meeting, after hearing everyone else’s views first.
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“I think that people at the (Fed) have found this method of conducting meetings to be much more valuable,” said Dean Croushore, a professor at Virginia’s University of Richmond who wrote an economics textbook with Bernanke. “However, if you are a chairman who only wanted his voice to be heard, then you might want to go back to the old way.”
A more-open Fed also has led to a wider mix of voices among Fed governors and high-level staff members, he said.
“There’s a lot more macro-economy theory and knowledge around the table than before. So I think it makes a lot more sense to gain from that knowledge and diversity of views than to shut it off,” Croushore said.
The consensus approach and new openness are partly what led to such a strong reaction to news of President Barack Obama’s preference for a Fed successor: confidant and former Treasury Secretary Lawrence Summers. He took himself out of the running on Sept. 15.
Liberals and women’s groups were angry that Obama had appeared set to pass over Janet Yellen, the Fed vice chairman and a veteran economist. She’d be the first woman to head the world’s most important bank.
“I was the vice chair and she was a member” of the Fed in the 1990s, “and she was a clear intellectual leader in the group,” said Alice Rivlin, the Fed’s first female vice chairman, who wants Obama to nominate Yellen. “She had lively contributions to make to the discussion of monetary policy. It wasn’t a period where monetary policy was as difficult as it is now.”
That’s an important point, because Yellen has been at Bernanke’s side throughout much of the post-crisis period.
Summers was also known for imposing his opinions on others, and he was the brash antithesis of the professorial Bernanke.
Like the current Fed chairman, Yellen is widely respected in economic circles and shares his calm demeanor. It’s why experts think her communication policy wouldn’t differ much from Bernanke’s.
Rivlin welcomed Bernanke’s deliberative approach but she pushed back against the idea that Greenspan didn’t sufficiently bring in the views of others.
“I think under Greenspan it was more of a consensus operation than the press realized. It’s inherently a committee, and you have to build consensus,” Rivlin said.
Communication will be crucial as the Fed moves to end its controversial program of purchasing government and mortgage bonds, a move that critics charge is artificially inflating the stock market.
The controversial purchasing – known as quantitative easing – is intended to force investors out of the safe returns of government bonds and into risk taking that supports economic growth. It does that by driving down interest rates, which also lowers the cost of borrowing money to buy a house, car or other big-ticket item that generally requires a bank loan.
Financial markets were thrown for a loop Sept. 18 when the Fed decided it wasn’t yet time to begin tapering off those purchases. Investors, worried about the markets standing on their own feet, had thought the Fed would begin backing off the purchases.
The surprise led many analysts to question how well Bernanke’s communication to the markets was working. In a news conference Sept. 18, he was peppered with questions about the market misread.
“We need to explain as best we can how we’re going to move and on what basis we’re going to move. It’s much more difficult today than it was 20 years ago, because the tools are more complex or they’re less familiar,” the Fed chief offered.