Have Fed Chair Odds Really Changed?

First, current Federal Reserve Vice-President Janet Yellen was President Obama’s likely selection to take over for Ben Bernanke when his term expires next year.

Then, Ezra Klein reported that the race was between Yellen and Larry Summers with Summers the current odds-on favorite.

Then, Senate Democrats revolted and the liberal blogosphere exploded against Summers.

Last Friday, Klein posited that a dark horse candidate could emerge, such as Roger Ferguson.

Let’s take a moment to calm down, ignore “inside sources,” and look at what has really changed over the past couple of weeks.

1. Liberals are as hardened as ever against Summers
2. Summers’s few statements on monetary policy indicate he’d be more hawkish than Yellen.
3. WSJ analysis showed that Yellen’s economic predictions have been correct more than anyone else’s at the FOMC.
4. Wall Street overwhelmingly wants Yellen over Summers.

Numbers 1, 3 and 4 there overwhelmingly favor a Yellen selection. For most liberals, number 2 would also work in Yellen’s favor, but Obama’s recent interview with the New York Times indicates that he’s still concerned about inflation and may want a more hawkish Fed Chair, as Summers would be.

So, given all that, how can Yellen not be the favorite? Klein is well-connected within the Administration and if anyone had an inkling on which direction Obama was leaning, it’d be him. But it’s worth remembering how secretive this selection is. Here’s Wonkblog’s Neil Irwin just a few weeks ago:

The most important thing to know at this stage is this: The people who know aren’t talking, and the people who are talking don’t know.

For a decision of this much importance and sensitivity, the president is likely to rely on a very small number of senior advisers to come up with a short list of candidates and advise him on their strengths and weaknesses. For the Fed chairmanship, the process is reportedly being led by treasury secretary Jack Lew, and likely also includes Denis McDonough, the chief of staff. It probably includes Gene Sperling, the top economic adviser in the White House, and possibly Jason Furman, who has been nominated to lead the Council of Economic Advisers. Perhaps a close Obama adviser like Valerie Jarrett gets a seat at the table, and somebody from the ever-discreet presidential personnel office in the White House.

Whoever makes that exact list, those are the only people who actually know the state of play on the decision — who’s up, who’s down, what attributes the president really cares about. The details of the decision-making will remain closely held even within the White House until an announcement is imminent. And those on that short list of people actually in the know will reliably clam up and reveal absolutely nothing when the topic comes up, whether it is with a former colleague outside government or a reporter, even when off the record.

Former White House economic adviser Jared Bernstein said the same thing last week:

No one knows who it will be.  Sure, there’s a short list and Summers and Yellen top it–btw, I wrote those names in no other order than alphabetical.  I would very heavily discount anything you read that says anything much more than what I’ve just told you.

I’m actually a bit surprised to see Klein buying into all of this back-and-forth about who’s leading the race. Maybe he has great sources or the Administration was using him to see potential reaction to choosing Summers. Either way, the developments over the past few weeks would seem to increase the chances of Obama choosing Yellen, not hurt them. Will Yellen be the eventual selection? Maybe. Maybe not. We’re not going to know for a while. But don’t discount her because a few rumors hint at the President leaning in a different direction. The fundamentals still point to her and if anything, have only improved over the past few weeks. She’s still the odds-on favorite to be the next Fed Chair.


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