Bush facing rare chance to shape Fed

Reuters ^ | May 19, 2005

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WASHINGTON (Reuters) - A decision by Federal Reserve Governor Edward Gramlich to step down from his post in August underscores the rare degree to which President Bush will have a hand in molding the U.S. central bank.

Bush has already named five of the seven members of the Fed's Washington-based board, although one of them, Vice Chairman Roger Ferguson, was initially chosen by President Bill Clinton.

Only two members do not owe their seat to Bush: Gramlich, who said on Wednesday he will step down Aug. 31, well ahead of the expiration of his term in 2008, and Chairman Alan Greenspan.

But Greenspan's term expires Jan. 31, 2006, so every Fed board member will eventually carry Bush's stamp.

"If and when a new chairman is selected, it will be a George Bush Board of Governors from top to bottom," said Tom Schlesinger, head of the Fed-watching Financial Markets Center in Philomont, Virginia.

Schlesinger said Bush would be the first president since Ronald Reagan to have appointed all members of the Fed board and only the fourth to do so since the board came into being in its current form in 1935.

The White House is already gearing up to replace Governor Ben Bernanke, whom Bush has chosen to head his Council of Economic Advisers.

The Senate Banking Committee is scheduled to hold a hearing on Thursday on Bernanke's nomination, which must be approved by the full Senate -- although the hearing could be postponed due to Senate wrangling over judicial nominees.

Sources say the White House is eyeing former Treasury official Richard Clarida for Bernanke's Fed seat, although any announcement would wait until after Bernanke is confirmed.

Clarida, a professor at Columbia University, is an expert on global imbalances and currencies. Analysts say that makes him particularly well-suited for the Fed at a time when the record U.S. current account deficit is fueling worry over the dollar's value.

With Gramlich's announced departure, the White House will have to quickly gear up once again.

But analysts stress picking someone to fill a board seat pales in comparison to the importance of choosing someone to take the helm when Greenspan leaves.

"By far the most important selection is the chairman, because if Bush chooses a chairman who has the right credentials, this person is going to be the leading force in monetary policy," said Mark Gertler, chairman of the economics department at New York University.

"The role of the other board members is to serve as a useful advisory cabinet to the chairman," he said.

FIREWORKS AHEAD

Lou Crandall, chief economist at Wrightson ICAP in New York, said wide agreement on how monetary policy should be conducted makes individual board choices less important than in the past.

"In Reagan's case, it was significant because he included some nominees who took a different tack from (Fed) Chairman (Paul) Volcker," he said. "Today what you see is a great deal of continuity in the way Fed appointees approach the job."

"The chairmanship is extremely important, without a doubt," Crandall added. "But the views of individual members are shaped by the broad external consensus that has developed about how monetary policy should operate."

John Shoven, director of the Stanford Institute for Economic Policy Research, said choosing successors for Bernanke and Gramlich was "a minor preliminary to the fireworks that will take place later, namely who the next chairman will be."

By now, the cast of characters presumed to have a good shot at the job is well known, though sources close to the White House say dark horses might yet emerge.

So far, Bernanke has made the list, as has former Bush adviser Glenn Hubbard and Harvard economist Martin Feldstein. Some analysts think former Bush Treasury official John Taylor, highly regarded in monetary circles but who disappointed some in his Washington role, may also have a chance.

Greenspan, who took the reins at the Fed in August 1987, is already the second-longest serving chief in the central bank's 92-year history and analysts say he will be sorely missed.

"It just seems like he's part of the landscape," Schlesinger said.

While speculation occasionally arises that the man dubbed the "maestro" might be persuaded to stay on for a few extra months to become the longest-ever serving Fed chairman, Greenspan has never signaled interest in that goal.

He would have to serve until June 9, 2006, to equal William McChesney Martin's record of 18 years, 9 months and 29 days.

While Greenspan could serve until he was replaced, a close associate said on Wednesday the chairman intends to step down when his term expires.

Delivering a commencement address on Sunday, Greenspan quipped: "I have more in common with you graduates than people might think. After all, before long, after my term at the Federal Reserve comes to an end, I too will be looking for a job."

[Josh in PA]

These guys are some of the smartest minds in the entire world.. Yet nobody in our Gov't listens to them (Re: Out of control spending).