Who Should Chair the Fed?

In the summer doldrums, the hot topic on financial pages is who should be the next chair of the Board of Governors of the Federal Reserve System. You are not going to get a prediction or an endorsement here. Rather, I would suggest that the choice should involve considerations of more than the economic philosophy or gender of the candidate.

The chair of the Fed leads an organization of 13 separate entities—12 reserve banks and the board itself—and more than 20,000 employees, most of whom have nothing to do with monetary policy. The Fed chair is a unique type of CEO. President Obama and his advisors, therefore, should ask three questions in considering potential candidates: Does the Federal Reserve need to change? Why or why not? What, if anything, needs to be changed?

Only six men have served as Fed chair since the Treasury-Federal Reserve accord of 1951, which liberated the Fed to run US monetary policy independent of the need to finance the government’s debt at low cost. I knew the first, William McChesney (Bill) Martin, and had the honor to serve under the next four, and have been a close observer of the incumbent: Ben S. Bernanke. My recent observations on my experience can be found at http://www.wamc.org/post/alan-chartock-conversation-ted-truman.

Some of those six leaders were agents of change in the operations and culture of the Federal Reserve System. That was true of Arthur Burns, who served from 1970 to 1978 and swept away the cobwebs of 19 years of benign rule by Martin. That was even true of the much-maligned G. William Miller, who was appointed by President Jimmy Carter, and who introduced greater discipline into the Fed’s day-to-day operations before resigning and becoming Treasury Secretary in 1979. Under Paul A. Volcker, Miller’s successor, the Fed not only whipped inflation, but also took major steps in democratizing the system, for example, in the representation on the boards of the Federal Reserve Banks and in the transparency of the Federal Reserve’s operations. With Alan Greenspan, appointed by President Reagan to succeed Volcker in 1987, the emphasis was on continuity and improved communication; though only under Bernanke—who succeeded Greenspan in 2006—were ┬ápress conferences introduced.

Some outside critics would say that Bernanke brought more of the same to the Federal Reserve—evolution not revolution—because he was an insider. If these critics are right, the new chair of the Federal Reserve should be an agent of change; 26 years is too long for any institution to tread water. If these critics are wrong, the case is strengthened for nominating an insider, and there are many potential candidates though some are more insiders than others.

If President Obama wants to leave his mark on the Federal Reserve as an institution for the good of the country, he must ask and correctly answer the question of whether the Fed needs change and how much change. The answer to this question is far more important to the Federal Reserve and the country than the course of monetary policy over the last three years of his presidency, which has largely already been set.