Obama Makes His Mark on the Federal Reserve

President Obama appointed Janet Yellen, president of the San Francisco Federal Reserve, shown here with her husband, Nobel-Prize-winning economist George A. Akerlof, as Vice Chairman of the Fed
President Obama appointed Janet Yellen, president of the San Francisco Federal Reserve, shown here with her husband, Nobel-Prize-winning economist George A. Akerlof, as Vice Chairman of the Fed

President Obama's nomination of two economists and a lawyer to seats on the Federal Reserve will bring the seven-member board to full strength for the first time in four years, allowing the Democrat to exert his influence over the long-term policies of the central bank while allowing it to maintain its current direction, economists say.

The appointment of Janet Yellen, president of the San Francisco Federal Reserve, as Vice Chairman didn't come as a surprise. Former President Bill Clinton appointed her to the Federal Open Market Committee where she served from 1994 to 1997. Later, Yellen was chairperson of the White House Council of Economic Advisers until 1999 when she returned to her faculty position at the University of California, Berkeley.

(Her husband, George A. Akerlof, winner of the 2001 Nobel Prize in Economics, also teaches at UC-Berkeley.)

Yellen's Views in Sync With Bernanke's

Yellen's views dovetail with those of Fed Board Chairman Ben Bernanke. In a recent speech, she said, "I expect the pace of recovery to gain momentum over the course of this year and next as households and businesses regain confidence."

Sarah Bloom Raskin, Maryland's commissioner of financial regulation, was also named as a Fed governor, as was Peter Diamond, an economics professor at the Massachusetts Institute of Technology. Raskin, who is married to a Democratic state senator, won kudos from the Maryland Bankers Association for the stewardship of her department. Diamond is an expert on social security, taxes and pension issues who was awarded the title of "Institute Professor" by MIT in 1997, the highest honor that can be awarded to a member of the university's faculty.

"This reinforces existing policies," says Mark Thoma, an assistant professor of economics at the University of Oregon who also writes an economics blog. "It will change the balance of power that tilts it back toward Washington and away from the regional Fed governors."

Make No Waves

Indeed, given Goldman Sachs Group 's (GS) recent legal troubles and the political fight over financial reform in the U.S. Congress, it seems as though the last thing that Obama wanted to do was to make waves. Lou Crandall, a money-market economist at Wrightson ICAP, an economics research firm, told The Wall Street Journal that the president "is looking to add people to the board who take regulation seriously."

In a recent note to clients, IHS Global Insight Chief US Economist Brian Bethune echoed the "staying the course" theme, writing, "With core inflation falling and substantial excess capacity in both the production sector and labor markets, there is no compelling reason for any change in the Fed's current stance on monetary policy."

Further, "The Fed needs to keep a steady hand on the tiller in order to forestall any sudden reaction from the market that could send yields even higher and upset the nascent recovery in the housing market."

When to Raise Rates?

One of the biggest challenges for the new Fed governors -- who are expected to be confirmed by the Senate -- is deciding when to raise interest rates that have been near zero since the worst of the economic meltdown in October 2008. The Fed's latest statement yesterday indicates that interest rates will remain unchanged as the economy improves, a view shared by most members of the Federal Open Market Committee.

Gus Faucher of Moody's Economy.com doesn't expect interest rates to fall until unemployment drops from its still-high rate of 9.7 percent, which he doesn't expect to happen until early next year. The current jobless figures are being propped up by the temporary hiring for the U.S. Census. Meanwhile, the housing market continues to struggle, with some experts expecting a record 1 million foreclosures to come this year and that a housing recovery may be three years away.

With so much on the Fed's plate, it's not surprising that Obama wanted to pick Fed governors who wouldn't shake things up.