America's dysfunctional politics might just preserve the central bank's independence, if inadvertently. President Barack Obama's pick as the next chairman of the Federal Reserve, Larry Summers, was torpedoed by Congressional opposition. That suggests an unwelcome increase of political meddling in the Fed's affairs. But if the Fed's internal choice, Janet Yellen, gets the job, isn't the central bank's sovereignty maintained? It's a messy way to the right outcome.
Through early this year, the market had pretty much assumed the president would nominate the current vice-chair, Yellen, to take over for Chairman Ben Bernanke when his second four-year term comes to a close in January. Instead, the White House shocked almost everybody in early summer when officials floated the name of Obama's former economic advisor, Summers, instead.
The move actually followed a pattern set by the president's other nominations. As with current Treasury Secretary Jack Lew, the president knows Summers well and trusts him. He might have naturally wanted someone ruling the Fed who had his backing. Though it is the president's prerogative to choose the Fed chairman, Obama's choice smacked of cronyism.
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It would be easy to conclude that, should Yellen get the nod, Congressional politics will have determined the leadership of the most important central bank in the world like never before in history. Fed independence, it might be said, was therefore dead.
Not so fast. Summers' pick was worrisome in part because of his strong ties to the president. By contrast, Yellen is a Fed insider, with limited connections to the current political establishment. That's not why Democrats on the Hill plumped for her over Summers. But it might turn out to be the best thing about her likely confirmation, maintaining Fed independence.
