Why Stanley Fischer is such an inspired choice as US Fed vice chair


It’s really quite incredible that there’s been more ink spilled over the decision of the American Studies Association, a US-based academic group, to boycott Israel than the potential nomination of Stanley Fischer, the former governor of the Bank of Israel, to become the next vice chair of the US Federal Reserve.ISrel Flag IconUSflag

It’s somewhat ironic that at a time when many critics are attacking the ASA’s decision (is it morally right to boycott the exchange of ideas, academic debate and discussion?), Fischer’s transition from Israeli central banker to US central banker would be a spectacular opportunity — for Fischer, for the Fed, for Israel, for the United States and, if the initial reaction holds, world markets, too.  Reuters reported late last week that Fischer was offered the spot, though there’s not been an official announcement.

Janet Yellen, the current Fed vice chair, is US president Barack Obama’s nominee to chair the Fed after Ben Bernanke completes his second term on January 31, 2014, and she is expected to be confirmed as the new Fed chair by the US Senate in a vote later this week.

Fischer, as the number-two official at the Fed, would bring with him eight years of experience setting monetary policy for Israel and the rock-star status of one of the world’s most accomplished economists.  As a longtime professor at the Massachusetts Institute of Technology, he not only served as thesis supervisor to Bernanke, the current Fed chair, but also Mario Draghi, the chair of the European Central Bank.

As The Financial Times reported last week, Fischer has a ‘dream resumé’ for the position, topped off by an eight-year stint as Israel’s central bank governor that is universally acclaimed:

Some clues to how Mr Fischer thinks about monetary policy come from his tenure as governor of the Bank of Israel. He was one of the country’s most respected public figures; when he announced he would be stepping down earlier this year, one commentator said the country was losing its last ”responsible adult”.

His eight years as governor coincided with fast economic growth, low unemployment – currently 6 per cent – and low inflation. Israel survived the financial crisis in 2008-9 without seeing a single bank collapse.  Unlike his predecessor Jacob Frenkel, who had a tight focus on fighting inflation, Mr Fischer is credited with broadening the Bank of Israel’s remit to influence growth and employment. His decisions were marked by pragmatism: he slashed interest rates in the wake of the financial crisis, then abandoned economic dogma to try to hold down Israel’s currency, before raising rates as the economy recovered.

Fischer was so successful in stabilizing Israel’s economy that the Bank of Israel was already raising interest rates by September 2009 — if it hadn’t been for his age (he’s 70 today), he would have been a strong candidate to succeed Dominique Strauss-Kahn as managing director of the International Monetary Fund in 2011.

Born in what is today Zambia, Fischer spent his childhood there and in what is today Zimbabwe (and what was then the colonial apartheid state of southern Rhodesia).  Fischer first came to the United States in 1966 for his Ph.D in economics at MIT, and he remained there as a professor through 1988, when he took a position as the World Bank’s chief economist for two years.  From 1994 to 2001, he served as the first deputy managing director of the IMF during the Asian currency crisis of the late 1990s and other financial crises from Mexico to Argentina to Russia.  After a brief stint in the private sector with Citigroup, he was appointed governor of the Bank of Israel in 2005 by then-prime minister Ariel Sharon — and recommended by the finance minister at the time, Benjamin Netanyahu.  He holds dual Israeli and US citizenship, and he would have been as credible a candidate to lead the Fed as either Yellen or former treasury secretary Lawrence Summers.

As Dylan Matthews wrote earlier this year for The Washington Post, Netanyahu and Sharon took a big chance on Fischer, who wasn’t an Israeli citizen at the time of his nomination:

No matter — Fischer’s results were more than enough to assuage any doubts. No Western country weathered the 2008-09 financial crisis better. For only one quarter — the second of 2009 — did the Israeli economy shrink, by a puny annual rate of 0.2 percent. That same period, the U.S. economy shrank by an annual rate of 4.6 percent. Many countries, including Britain and Germany, fared even worse.

So what would his appointment mean for the Fed? 

While Fischer would echo the same support as Yellen for the Fed’s second mandate for full employment (alongside its mandate to maintain low, steady inflation), he’s been slightly more critical of the quantitative easing that Bernanke’s Fed initiated in the aftermath of the 2008-09 global financial crisis.  After three rounds of quantitative easing, the most important policy matter for the Yellen Fed will be how to ‘taper’ the Fed’s QE efforts.  Everyone expects that Yellen (with or without Fischer) will taper only very gradually — US unemployment levels remain at historically elevated levels, though the unemployment rate fell in November to a five-year low of 7.0%.

If the Fed tapers too fast, it could suck much of the capital out of the developing world, thereby bringing a destabilizing end to the boom that’s boosted emerging market investment over the past four years (an effect that’s already happening from India to Brazil), and it could decelerate an economic recovery in the United States that’s been hesitant at best — US unemployment is only slowly falling, job growth remains relatively tepid compared to past recoveries, and GDP growth hovered at just around 2% for the past three years, hardly the kind of performance that marks a rapid turnaround. 

If the Fed tapers too slowly, it risks keeping too many dollars in the global economic system.  While that was fine in the immediate aftermath of the financial crisis, when individuals and corporations alike began amassing huge cash reserves, there’s already fear that the Fed’s QE has, by creating an emerging markets boom, repeated the same mistakes that led to the dot-com tech boom of the early 2000s and the housing market boom of the late 2000s.  If the Fed waits too long, it risks allowing other bubbles to form (ahem, student debt and higher education), with the potential for overheating and inflation.

Fischer will also have to help determine how the Fed should issue ‘forward guidance’ on QE tapering and future interest rate increases — whether to issue such guidance, when to announce it and how much guidance is appropriate.  By forecasting its steps, the Fed could limit the abrasive effects of decision-making upon world markets.  But if new circumstances emerge, such forward guidance could either limit the Fed’s maneuverability (if it limits the Fed’s ability to change course) or reduce the Fed’s future credibility (if the Fed abandons its previous guidance to change course).

Fischer’s appointment would give the Yellen-Fischer axis extraordinary power to set Fed policymaking, especially within the all-important Federal Open Market Committee (FOMC), which is comprised of the seven members of the Fed’s Board of Governors and a rotating slate of five of the 12 governors of the regional Federal Reserve Bank presidents.  Moreover, Fischer’s reputation for pragmatism and his legendary role in economics over the past four decades — as the Bank of Israel governor, a top IMF and World Bank official and mentor to dozens of other influential policymakers — means that if Yellen can convince Fischer, she can likely convince the rest of the FOMC

The bottom line is that his credibility would buttress the first tough decisions of the Yellen Fed, thereby reducing the risk that markets lose faith in the Fed’s judgment.  Who knows?  His selection might even help boost the often difficult relationship between Obama and  Netanyahu.

His nomination would also be part of a growing — and, I believe, beneficial — trend.  It would be the latest of a series of international central bank appointments that have made the rarefied world of central bank governors seem more like the NBA draft than selecting somber policy officials to lead national institutions.  Mark Carney, the governor of the Bank of Canada from 2008 until earlier this year, started his first term as the governor of the Bank of England in July 2013.  Raghuram Rajan left a position as an academic all-star at the University of Chicago to lead the Reserve Bank of India at a time of particular political volatility and economic turbulence in the world’s second-most populous country.

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