Federal Reserve officials will gather in their Washington board room this week to decide on policies that will unfold over the next two to three years without knowing who will lead the institution during that time.
Sunday’s announcement that Lawrence Summers has withdrawn his name from Obama’s list of candidates to succeed Fed Chairman Ben Bernanke threatens to weaken the central bank’s policy message by leaving the succession unsettled just as it considers scaling back record accommodation.
Policy makers will decide at their meeting today and Wednesday whether the economy is strong enough to begin tapering $85 billion in monthly bond purchases. As they do so, they will use so-called forward guidance to convince investors they can keep interest rates low for as long as it takes to bring down unemployment so long as prices remain in check.
“The biggest problem with this period of indecision about Bernanke’s successor is that it does have an effect on the Fed’s ability to conduct monetary policy,” said Ward McCarthy, chief financial economist at Jefferies LLC in New York and a former Richmond Fed economist. “The market rightfully questions forward guidance, and that reduces the effectiveness of monetary policy.”
At this week’s meeting, officials will probably lower their estimates for growth for this year and next for the third consecutive time. To keep bond yields from rising and threatening growth, officials will need to emphasize their message that the benchmark interest rate is likely to remain low.
In July, Obama mentioned three possible nominees for the chairmanship: Summers, 58, Fed Vice Chairwoman Janet Yellen, 67, and Donald Kohn, 70, a former Fed vice chairman who is now a senior fellow at the Brookings Institution.