Next Fed Chairman? The Battle Over Larry Summers

Progressive groups, in particular, strongly dislike the idea of Summers as chairman of the Fed. Groups like MoveOn and the Campaign for America’s Future have started petitions against Summers.

Any nominee for Fed chairman is likely to run into a contentious confirmation process in the Senate. But because of his political baggage, Summers might face a tougher road to the Fed.

Summers’ first hurdle would be in the Senate Banking Committee. Democrats hold a 12-10 majority there, but three of those Democrats – Jeff Merkley (Ore.), Sherrod Brown (Ohio), and Elizabeth Warren (Mass.) – are skeptical of Summers. Brown has told Reuters he would vote against Summers. Warren, for her part, is working on bringing back a modern version of the Glass-Steagall Act.

His nomination would also face some obstacles before the whole Senate. Democrats have 54 votes in the Senate, which means they are six short of the number to shut down a filibuster. Since it is unlikely that all members of Obama’s party will support a Summers appointment, the president might need some Republicans to make up the difference to push Summers’ nomination through the Senate.

Widely seen as a dove, a shorthand term used by monetary policy observers to describe someone worrying more about economic weakness than any threat from inflation, Yellen is not tied to the Obama administration’s economic policies like Summers. Her reputation as a dove will not particularly make her popular among Republicans who, based on some of her comments, could conclude that she is more worried about unemployment and less worried about inflation risks than recent Fed chiefs. But her lack of affiliation with Obama’s economic policies could raise her stock among Republicans.

On the other hand, Summers has a less clearly articulated approach to monetary policy. Given past statements and speeches, Summers seems to believe that quantitative easing has been more effective at widening the wealth divide than creating jobs. He has also stated his preference for fiscal stimulus over additional monetary stimulus.

The effort to block Summers so far includes a letter circulated by Brown and signed by 19 Senate Democrats urging the president to nominate Yellen over Summers.

Current Fed chairman Ben Bernanke is expected to step down by the end of the year as his term ends Jan. 31.

The next chair of the Fed will take the helm at a critical moment. Since 2008, the Fed has taken unprecedented steps to battle the recession and stimulate the recovery. The central bank is currently spending $85 billion a month buying financial assets in the markets to lower long-term interest rates. The U.S. economy remains weak and much can go wrong on the way back to a normal monetary policy. This means Bernanke’s successor will need to reassure markets that he or she is ready to raise interest rates when necessary and can anticipate, and react to, rapidly changing circumstances.