Who Should Run the Fed?

Yellen, Kohn, or the People

Kurtis Garbutt / Flickr

The fight over who will succeed Ben Bernanke as chair of the U.S. Federal Reserve rolls on, getting bigger and more tangled as it goes. It is easy to get caught up in the debate about the merits of different candidates, but doing so misses a larger point. The real story here is the intensity of the fight itself, which is evidence of a shift of power toward central bankers that began under U.S. President Ronald Reagan and has been aggravated since the financial crisis of 2008.

There was a time, years ago, when the appointment of a new Fed chair wasn't such a big deal. In the summer of 1969, there was nothing like today’s fuss when President Richard Nixon announced the appointment of Arthur F. Burns, who then headed the Council of Economic Advisers, to the top job at the Federal Reserve. Likewise, President Jimmy Carter's 1977 decision to oust Burns in favor of G. William Miller was a sedate affair by current standards.

But that was a different era, when the Federal Reserve played a less prominent role. The principle of Fed autonomy was less firmly established, and many people still believed that the real authority over monetary policy resided in the White House. (A 1969 New York Times analysis actually called it "the myth of Federal Reserve independence.") International financial markets were less developed, and not as effective in punishing countries whose monetary policies seemed to go astray. And in any case, fiscal policy was still regarded as an equally important tool for economic management, which remained firmly in the hands of the U.S. Congress. Under these circumstances, it did not matter as much who the next Fed chair would be.

The world changed after 1980. Economists grew skeptical about the merits of using fiscal policy to manage the overall economy, partly because of their doubts about the competence of politicians in using that tool wisely. They were also convinced of the need to place monetary policy in the hands of

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