President Barack Obama on Thursday nominated Janet Yellen, the president of the San Francisco Federal Reserve Bank and a renowned monetary policy dove, to be vice chairman of the U.S. central bank.
He also nominated Sarah Raskin, Maryland's financial regulation commissioner, and MIT economist Peter Diamond, who has written extensively about pensions and fiscal issues, to fill two open seats on the Fed's seven-person board.
The trio, if approved by the Senate, would take their seats as the Fed faces the challenge of how to steer its way out of an unprecedented level of monetary stimulus.
In addition to slashing interest rates to near zero percent in response to the 2008 financial crisis, the Fed undertook a host of emergency measures that some economists fear will stoke inflation in the future.
The three would also come on board as the Fed defends its regulatory capabilities and emergency powers before a skeptical Congress, which faults the central bank for lapses that contributed to the financial crisis.
Yellen, an experienced central banker viewed as emphasizing economic growth and employment over trying to protect against inflation, and therefore labeled a dove by Fed watchers, would replace Donald Kohn, a 40-year Fed veteran who is to retire from the Fed's No. 2 spot on June 23.
If all three are approved by the Senate, as expected, they would bring the board -- the epicenter of U.S. monetary policy -- to full strength for the first time in nearly four years.
OBAMA'S STAMP ON FED
Yellen's policy reputation raises the prospect of a shift in emphasis to a more accommodative stance at the central bank as she takes on the No. 2 role.
The Fed not only slashed interest rates to near zero in response to the 2008 market meltdown, but also undertook a host of emergency measures that some economists fear will stoke inflation in the future.
However, analysts noted that even though as a board member, Yellen will vote on policy all the time rather than one year in three as a regional Fed governor, she has already had a voice in the debate.
To evaluate how Yellen's job change impacts the committee, we have to know who her replacement will be at the San Francisco Fed, Pierpont Securities economist Stephen Stanley wrote in a note to clients.
Nevertheless, having made five nominations to the seven-member Fed board means Obama's imprint on the central bank will have been substantial. The president has also named Governor Daniel Tarullo, a lawyer and regulatory expert, and renominated Ben Bernanke to a second term as chairman.
The president's selection of a bank regulator with a track record of consumer protection actions and an economist who has looked closely at the government-run Social Security retirement program reflects the current political Zeitgeist.
Social Security faces deficits as the baby boom generation reaches retirement age, and public worry about record budget deficits has become a contentious theme as majority party Democrats seek to maintain control of both houses of Congress in November elections in which they are expected to lose seats.
In addition, Obama and congressional Democrats are wrangling with Republicans to pass an overhaul of financial rules amid public resentment of bank bailouts and Wall Street profits during a time of high unemployment and extensive mortgage foreclosures.
The character of the Federal Reserve Board is in fact shifting from one which was more laissez-faire in orientation to one which is increasingly taking on a more activist bent and a feeling of more engagement with the economy and the financial system, said Richard DeKaser, president of Woodley Park Research, a forecasting group.
EXPERIENCED CIVIL SERVANT
In tapping Yellen for the No. 2 slot, Obama is selecting a top-flight economist with a long history of public service and ties to Democratic administrations.
Yellen worked for President Bill Clinton as chair of the White House Council of Economic Advisers between 1997 and 1999, and was a governor on the Federal Reserve Board in Washington between 1994 and 1997. She commands wide respect within the Fed system, academia and from financial markets.
Raskin would be among the few policymakers with direct experience supervising banks. She has sought recently to tighten rules limiting the cost of short-term payday loans in Maryland.
Diamond co-authored a book on Social Security with Peter Orszag, now the director of the White House Office of Management and Budget that was critical of President George W. Bush's proposal to allow workers to invest in private accounts instead of receiving guaranteed benefits from the government.
(With additional reporting by Steve Holland)
(Editing by Patrick Graham and Dan Grebler)