Under Chairman Bernanke, the central bank has pursued a goal of transparency that has communicated its policy intentions more clearly to investors– a departure from the traditionally secretive business of monetary policy. A job typically suitable for introverts, Bernanke has given many television interviews and participated in the Fed’s first press conference in its history, which means that his successor will not only have to be able to set monetary policy but also to explain it to the public.
The names of some of the potential candidates have started to emerge, such as Larry Summers and Janet Yellen. President Obama appointed Yellen to her current position as vice chair, and she is likely to top the candidate list because of her experience working many years for the central bank, ensuring a smooth transition. Whomever Obama appoints, we should expect to see the slow confirmation process start sometime around May next year.
Bernanke, initially appointed by President George W. Bush, was nominated for a second term by Obama in 2009. During Bernanke’s second term, the Fed has pursued unconventional efforts to spur growth, prompting criticism from many Republicans. With Obama staying in the White House for another four years, he might choose to provide the continuity that markets find so reassuring, opening the door for a potential third term for Bernanke.
The close relationship between federal government and central bank has seen the Fed’s Treasury bond holdings expand to almost $3 trillion and its holdings of mortgage-backed securities to $884 billion. A change in this relationship is unlikely to occur anytime soon, as both government and Fed officials are still pushing for a substantial improvement in the labor market. The announcement following the meeting this week might just confirm that.