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 The arrival of former Bank of Israel Governor Stanley Fischer and
former U.S. Treasury official Lael Brainard will add two strong
voices to back Chair Janet Yellen's view that loose monetary policy
needs to be extended to turn around a slack labor market.
Fischer intervened directly in Israel's mortgage market to tackle a
real estate bubble, while Brainard pushed EU governments hard for
more aggressive action from the European Central Bank during the
euro zone crisis.
Interviews with former colleagues and a review of their public
statements and published material also suggest both will want the
Fed to remain in activist mode long after its current programs wind
down and its bloated balance sheet shrinks.
How they influence the U.S. central bank is a critically important
question for investors, who are searching for clues on when the Fed
will lift interest rates from near zero, where they've been since
late 2008. It is a debate that may well be the defining one of
Yellen's tenure.
In coming months, the Fed may have to remake the tools it uses to
control interest rates, choose whether to liquidate or hold the $4
trillion of investments it has on its balance sheet, and decide when
to begin pushing borrowing costs higher. It will also need to make
longer-term decisions about how closely it wants to be involved in
monitoring and shaping financial markets to guard against another
systemic crisis.
Fischer, who is nominated to be Fed vice chairman, is expected from
day one to pursue his belief that central banks need to develop new
powers and tools to prevent future crises.
"What Fischer can bring to the table is some very valuable practical
experience guided by a strong analytical framework," said David
Stockton, the Fed's former research director and now a senior fellow
at the Peterson Institute for International Economics.
Fischer, 70, sees "a lot of work to be done" to get central banks to
integrate concerns about financial stability into their monetary
policy decisions, said Stockton. "As he has looked at the crisis and
thought about the advanced economies, he has seen there are some
serious lapses."
Divisions within the Fed over how long to extend its activist
approach are likely to increase. A number of officials, including
Kansas City Federal Reserve Bank President Esther George and
Richmond Fed chief Jeffrey Lacker, have warned about the threats
that might develop if current policy is kept in place too long,
arguing it should shift back to a more traditional, less
interventionist role. St. Louis Fed President James Bullard said
last week he felt inflation was starting to gain traction, raising
the risks of keeping easy monetary policy in place too long.
Fischer and Brainard are unlikely to back any proposals to push the
Fed back into a corner.
According to colleagues who have worked closely with him, Fischer's
concerns over financial stability have become steadily more
important to his thinking - to the point where he feels central
banks should stand ready to intervene in markets in a way likely to
draw opposition from those who prefer a hands-off approach.
In Israel, he used a variety of tactics to isolate and deflate what
he concluded was a risky asset bubble in real estate, including
imposing higher loan-to-value requirements for lending that targeted
the entire mortgage market.
By contrast, the new powers and responsibilities established for the
Fed under the Dodd-Frank financial reforms have dealt with
regulation of individual banks, not rendering judgment on whether
specific asset markets are growing too fast.
"The central bank has to be one of the central elements in building
the system of macro prudential supervision," Fischer said last fall
at a conference at the International Monetary Fund, where he served
as the No. 2 official in the 1990s, playing a leading role in
battling the Asian financial crisis.
The regulatory system, he argued, can no longer concentrate just on
standards for individual financial institutions, but instead "needs
to ask itself what are the interactions within the financial system
that could lead to problems over and beyond those that would arise
for individual banks."
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Fischer and Brainard declined to comment for this article through a
Fed spokesperson, citing their pending nominations. The Senate is
expected to approved Fischer's nomination this week. It is unclear
when it might vote to confirm Brainard.
'BAZOOKA' THINKING
Like Fischer, who was born in what is now Zambia, Brainard spent her
early years overseas, as the daughter of a diplomat posted to
Germany and Poland at the end of the Cold War. A Washington fixture,
she served in both the Clinton and Obama administrations and spent
the intervening years at the Brookings Institution, a top think
tank.
Brainard, 52, reached the upper ranks of the U.S. Treasury as
undersecretary for international affairs, but does not have as deep
a background in monetary policy as Fischer.
Her work in Washington has been less that of a technical economist
and more about the political economy of globalization and
international institutions.
But during the crisis that threatened to break up the euro zone
while she was at Treasury, she voiced an expansive faith in what
central banks can and ought to do, often serving as the point person
in the Obama administration's efforts to goad Europe into stronger
action.
European officials who worked with her during that period, as well
as U.S. government colleagues, describe a tough bureaucratic
infighter - someone not prone to easy compromise once she has made
up her mind. In sometimes heated meetings, Brainard encouraged
European officials to throw out their existing rule book and
radically expand the European Central Bank's role.
"There was this whole idea of the 'bazooka,'" or using the central
bank's resources to overwhelm concerns that one or more European
countries might default, said Jean Pisani-Ferry, former head of the
Bruegel think tank in Belgium and now an adviser to the French
government. "That basically came from them," he said in reference to
then Treasury Secretary Timothy Geithner and Brainard.
Former colleagues tell of battles she waged within the
administration to increase U.S. assistance to the World Bank, or
beat back what was seen as an effort by the State Department to
intrude on Treasury's oversight of the bank and the IMF.
"She can be very assertive where she has strong views," said Robert
Hormats, vice chairman of Kissinger Associates and a former senior
State Department official.
Both Brainard and Fischer are expected to deepen Fed discussion of
how its decisions may impact the global economy and vigorously
defend U.S. policy overseas.
Fischer's time as a central banker came as Israel was buffeted by a
crisis that emanated from the United States. He certified his
standing during that time as an economist both rooted in tradition -
he literally wrote the book on modern macroeconomics - and willing
to discard convention.
"He'll use whatever tools are available," said former Fed Vice
Chairman Donald Kohn.
(Reporting by Howard Schneider and Michael Flaherty; Editing by
Martin Howell)
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