Two years ago, in April of 2010, President Obama nominated economist Peter Diamond to the board of the Federal Reserve. Four months later, after Republicans in the Senate blocked his appointment, Obama nominated him again. After almost a full year of waiting, Diamond gave up and withdrew his name from consideration last summer. Republicans’ complaint: Diamond, who won the Nobel Memorial Prize while waiting by the phone to hear about his appointment, didn’t have the monetary chops to serve at the central bank. The reality: Republicans in Congress want to deny Obama the ability to appoint any nominee who believes that the Fed should try to affect employment, one half of the bank’s dual mandate. It’s still happening.
On Monday, Louisiana Senator David Vitter placed a hold on Obama’s latest two Fed nominees, Jerome Powell and Jeremy Stein, tossing them into the same limbo where Diamond lived for two years and making it unlikely they’ll be confirmed by year’s end. “I refuse to provide Chairman Bernanke with two more rubber stamps who approve of the Fed’s activist policies,” Vitter said.
But perhaps more curious than Senate intransigence on this issue is Obama’s decision–ongoing for years now–not to respond to this problem with urgency. After all, he wielded recess appointments to bolster what he saw as some of his most important accomplishments as President: a health care entitlements chief in Don Berwick and a director, Richard Cordray, for his new financial consumer protection agency. But nothing is more important to Obama’s presidency, to his re-election and to the American people than the economy. And believe it or not, these two nominations are Obama’s last remaining tools to influence U.S. economic policy.
There’s no need to get too technical here. Fiscal policy requires Congress’s cooperation. Barring disaster-dodging like 2011’s debt-ceiling deal and impending wrangling over the Bush tax cuts, that’s a non-starter: Republicans aren’t willing to vote for fiscal stimulus, full stop. Monetary policy is also largely out of Obama’s hands–that power lies with Ben Bernanke at the Federal Reserve. But Bernanke does respond to the other members on the Federal Open Market Committee, who could prove crucial as the politics of the Fed shift.
After the FOMC’s last statement in April, The Economist‘s Greg Ip wrote the following about Bernanke’s increasing isolation in arguing for easy money, and how the hawks are slowly picking off the doves at the central bank:
First, as the ranks of doves on the FOMC dwindle, the balance of Fed chatter between meetings will become more hawkish, which will cause markets to periodically price in tighter policy. That will make financial conditions and thus monetary policy tighter. Recall how publication of the March FOMC minutes tanked the bond market when it disclosed only isolated, and tentative, support for QE3. This almost certainly overstated the shift in Mr Bernanke’s own views but markets had no way of knowing that.
The second problem is that even if Mr Bernanke’s views prevail while he remains chairman, the odds are that he no longer will be after January, 2014. He is unlikely to be reappointed even if Barack Obama is re-elected (even if wanted the job, a big if, he probably couldn’t be confirmed), and certain not to be if Mitt Romney wins. So someone else will make the call on when to start tightening. Whoever that person is will feel the burden of every newly installed central banker of demonstrating his or her anti-inflation credentials and independence from the person who appointed them, which biases them to tightening. Being dropped onto a committee already stacked with hawks only increases the pressure.
In other words, two Obama nominees could change things. Sure, Fed appointments only have a marginal effect–at this late date, maybe nothing would happen–and there are many better tools for influencing the economy. But none of them are currently available to Obama.