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Who'll head Fed post-Greenspan?

By Nell Henderson
The Washington Post

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WANTED: Brilliant economist. Must be politically savvy, trusted by Wall Street, a strong leader and consensus builder, cool in a crisis, able to calm world markets with a few words and likely to guide the economy into robust health in time for the 2008 presidential election.

In other words, someone to succeed Federal Reserve Chairman Alan Greenspan, who indicated at a recent Capitol Hill hearing — for the first time publicly — that he intends to step down from one of Washington's most powerful jobs when his Fed board term expires in late January 2006.

The 78-year-old chairman's silent, affirmative nod to a lawmaker's question instantly elevated "Who Will Succeed Greenspan?" from a longtime Washington parlor game to among the most important outcomes of the presidential race.

The succession issue may land on the next president's desk soon after Inauguration Day on Jan. 20, one year and 11 days before Greenspan's term ends.

With the stakes so high, the next administration will want to plan early for a smooth transition, according to people close to the campaigns and candidates.

In interviews with more than a dozen people who follow the Fed closely, there was virtually unanimous agreement about the leading contenders.

The sources — economists and political operatives on Wall Street and in Washington — generally spoke on condition that they not be named because they know one or more of the candidates and expect to work in the future with whoever takes over.

Bush's list of candidates is likely to start with Harvard economist Martin Feldstein, 64, and Columbia Business School Dean Glenn Hubbard, 46, both of whom are highly respected within academic circles and the White House, these observers say.

Feldstein served in the Reagan administration as chairman of the White House Council of Economic Advisers (CEA) and is considered the father of "supply side" economics — the belief that cutting taxes stimulates economic growth — because of his pioneering research on how taxes affect business and consumer behavior.
 
Hubbard was CEA chair in the first years of the current Bush administration and is described by colleagues as the architect of many of the president's tax-cut policies, particularly the proposal to eliminate taxes on many stock dividends.

A Kerry victory would likely mean that Robert Rubin, 66, chairman of Citigroup's executive committee and Treasury secretary during the Clinton administration, would get the right of first refusal, say several people close to Rubin and the Kerry campaign.

Rubin, who was prominently seated next to Kerry's wife at the Democratic convention, has been a frequent critic of Bush's economic policies. If he didn't want the Fed job himself, he would have a strong say over whom Kerry considers, these observers said.

After Rubin, the next likely Democrat is Harvard President Lawrence Summers, 49, a top economist who worked closely with Rubin in the Clinton Treasury Department before succeeding him as secretary.

Feldstein, Hubbard, Rubin and Summers were either unavailable or declined to comment for this article about their interest in the Fed chairmanship.

Because of the Fed chairman's enormous influence on the U.S. economy and global financial markets, the selection will be among the most far-reaching decisions to be made by the next president.

Greenspan's tenure, now in its 18th year, illustrates how a successful chairman can outlast several presidents, leaving a large imprint on the nation's history.

Members of both parties also are well aware of the Fed chairman's potential impact on economic policy beyond the Fed's official responsibilities. Greenspan's support helped win passage of the 1993 Clinton deficit-reduction plan, while his call for a tax cut in 2001 helped the Bush tax package sail through Congress.

"The Fed is so important," said Kevin Hassett, a GOP economist at the American Enterprise Institute. Any president would know "it's in his own best interest to have the best possible Fed chairman because when the economy is doing well, incumbents win."

Yet the job requires more than a dazzling economic brain.

"This is a political appointment with a capital P," said Carl Weinberg, chief economist with High Frequency Economics, a research firm in Valhalla, N.Y.

"The person who makes Fed policy will determine the re-election prospects (of the president). ... You'll want someone who is tested in the halls of politics and whose allegiance is unquestioned."

The Fed's chief responsibility, by law, is to achieve low inflation and maximum employment through the use of monetary policy — essentially determining the economy's money supply by raising or lowering short-term interest rates to adjust the availability of credit.

Although it sounds arcane, good monetary policy is critical to Americans' well-being, influencing prices, the cost of borrowing and even the unemployment rate. And because the U.S. economy is the world's largest, its health affects the rest of the world.

Although the four top candidates have broad economic experience, none has focused his career on monetary policy, so it is hard to gauge their likely approach to the job.

Party affiliation is not a good predictor: Fed officials of both parties are closely aligned these days in a consensus, developed over the past two decades, that the best way to foster economic growth and lower unemployment is to keep inflation very low.

That buried the argument made by many economists and politicians until the late 1980s that the Fed could reduce unemployment by letting inflation creep higher.

Rubin, Summers, Feldstein and Hubbard have emerged as the favorites partly because of the non-economic requirements of the job.

Greenspan showed that a strong, politically adept Fed chairman can lead the central bank in the direction he wants, while protecting the institution from White House and congressional pressure, observers agree.