Will Obama Remake the Fed?

With the filibuster out of the way, the president has a chance to reshape the most powerful central bank in the world.

CAMBRIDGE, MA - OCTOBER 11: Massachusetts Institute of Technology professor Peter Diamond addresses the media after winning the 2010 Nobel Prize in Economic Sciences on October 11, 2010 in Cambridge, Massachusetts. Diamond is one of three winners named on Monday for his work on theories for how unemployment can be affected by economic policies. 
National Journal
Catherine Hollander and Shane Goldmacher
Catherine Hollander Shane Goldmacher
Nov. 27, 2013, midnight

With the fili­buster gone, Pres­id­ent Obama now has a chance to dra­mat­ic­ally re­shape the Fed­er­al Re­serve, and of­fer Re­pub­lic­ans ex­actly noth­ing in ex­change.

In a span of only a few months, Obama is ex­pec­ted to ap­point at least four of the Fed’s sev­en gov­ernors to the in­flu­en­tial board that sets Amer­ica’s mon­et­ary policy. These picks will show just how ag­gress­ively the White House plans to ex­ploit its ap­point­ment powers in the new fili­buster-free Sen­ate.

Pre­vi­ous at­tempts to in­stall his eco­nom­ist of choice at the Fed were met with Re­pub­lic­an op­pos­i­tion, and ul­ti­mately ob­struc­tion. Re­mem­ber No­bel Prize win­ner Peter Dia­mond, who with­drew amid united GOP op­pos­i­tion in 2011.

Obama then re­sor­ted to ap­point­ing a Demo­crat and Re­pub­lic­an to­geth­er to mol­li­fy the GOP minor­ity and break the con­firm­a­tion lo­g­jam. (No pres­id­ent had ap­poin­ted a Fed gov­ernor of the op­pos­ite party since 1988, al­though a hand­ful of re­appoint­ments were made.)

Now, such ap­pease­ment is un­ne­ces­sary and un­likely. 

“The Re­pub­lic­an point of view is so di­min­ished at this point it’s al­most ir­rel­ev­ant,” said a seni­or Sen­ate Re­pub­lic­an aide.

In prac­tic­al terms, this means Obama could put for­ward a series of doves — eco­nom­ists largely favored by Demo­crats be­cause they sup­port lower in­terest rates and looser mon­et­ary policy — in­stead of the hawks that Re­pub­lic­ans typ­ic­ally prefer.

But polit­ic­al party doesn’t al­ways align with hawk­ish and dovish tend­en­cies. And for Obama to take full ad­vant­age of the new fili­buster re­stric­tions, he will need to en­sure all Demo­crat­ic sen­at­ors get in line be­cause he is un­likely to get any Re­pub­lic­an sup­port on any nom­in­ee after Demo­crats took away the GOP’s most power­ful tool.

“What the nuc­le­ar op­tion has done is uni­fied Re­pub­lic­ans. With few ex­cep­tions they will vote against every nom­in­ee,” says Bri­an Gard­ner, seni­or vice pres­id­ent of Wash­ing­ton re­search at in­vest­ment firm Keefe, Bruy­ette & Woods. “If it em­boldens the White House to get more lib­er­al, they may find that a num­ber of Demo­crats are go­ing to aban­don them and there’s no way they can at­tract Re­pub­lic­ans in some of these cir­cum­stances.”

In­deed, while Janet Yel­len’s nom­in­a­tion to re­place Bernanke as Fed chief is likely not at risk — she already cleared the Bank­ing Com­mit­tee with some GOP sup­port and is ex­pec­ted to re­tain the sup­port of at least 51 Demo­crats — Obama has to be care­ful with oth­er picks.

And he’ll need to act quickly if he wants Yel­len to start her term with a full-strength com­mit­tee. Most prom­in­ent among the names floated to fill va­cant spots at the Fed is Lael Brainard, who served as the Treas­ury De­part­ment’s un­der­sec­ret­ary for in­ter­na­tion­al af­fairs for the past three and a half years. Brainard ad­vised Obama dur­ing his 2008 pres­id­en­tial cam­paign and was also an ad­viser to the Clin­ton ad­min­is­tra­tion.

Brainard’s name was float­ing around pri­or to the fili­buster re­form’s pas­sage last week; new names have yet to sur­face for the board in the in­ter­im.

One po­s­i­tion, formerly held by Eliza­beth Duke, has been va­cant since sum­mer. An­oth­er board mem­ber, Sarah Bloom Raskin, has been nom­in­ated to a po­s­i­tion at Treas­ury, and the Sen­ate Fin­ance Com­mit­tee held her con­firm­a­tion hear­ing last week.

And those seats could be just the start. Jerome Pow­ell’s term ends in Janu­ary, al­though the pres­id­ent could re­appoint him. There has been talk Jeremy Stein may de­cide to de­part next year to keep his ten­ure at Har­vard. And there are ques­tions about wheth­er Daniel Tarullo, an­oth­er Fed gov­ernor, will want to stick around once Yel­len is in charge.

Obama and Sen­ate Demo­crats, if they stay united, alone can de­term­ine all of the re­place­ments. And Re­pub­lic­ans are left to fret from the side­lines.

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