Current Federal Reserve Chairman Ben Bernanke has endured some of the most difficult economic times in modern history, having presided over financial disaster and the Great Recession. The 2007-09 recession placed a heavy burden on Bernanke, who has taken a monetary approach toward interest rate targeting.
But as Bernanke's term is set to expire this January, who will be the next to take the reins of the massive ship that is the U.S. economy? There is growing consensus current Fed Vice-Chairwoman Janet Yellen will earn the nomination. A primary worry among investors and politicians is whether a new head of the Fed will be able to successfully withdraw from the current Quantitative Easing policy without incurring too much collateral damage.
The Fed's two primary aims are to keep prices stable and keep unemployment low. The QE policy adopted by Bernanke buys roughly $85 billion in treasury bonds and mortgage assets per month in order to keep interest rates low. In theory, lower interest rates will spur business investment, thereby allowing more hires.
This aggressive monetary policy is ultimately limited insofar as it relies on the banks to do the grunt work of the policy: issuing out loans for businesses to expand. Unfortunately, the demand for these loans is not very strong, and as such, employment has trickled behind other economic indicators like the stock market.
While the Fed's stimulative monetary policy has aided liquidity markets, it has not brought the substantive, tangible effects on the labor market like an improved fiscal policy would.
So, if Yellen does get the nomination, what happens? The answer: Not much. Yellen would likely lead a withdrawal from QE and allow interest rates to go back up once unemployment has fallen to a tolerable level, possibly 6.5%.
While the labor market continues to slug behind expectations, one is left to wonder: Why is there no fiscal policy being implemented, or even considered, to bring the economy closer to its potential output? Why not more job-skills programs? Why not investigate possible apprenticeship programs like the one Germany uses to equip young people with skills they need to gain employment?
Ultimately, whichever way the Fed goes with its next chairman or chairwoman, the lack of legislative effort to boost a below-potential economy inhibits its overall economic effectiveness.
Why not build more roads, invest in more scientific causes, fund renewable energies, and repair our D+ rated infrastructure? Infrastructure spending is an investment we know will produce larger returns than what it costs. And sooner or later, we'll have to rebuild anyway, so why not do it now when the labor market needs it most?
There are other intriguing options for the Federal Reserve chair position, namely Stanley Fischer, former governor of Israel's central bank. A Fischer appointment could point to a drastic shift in strategy for the Fed: While the current approach is to keep interest rates low, in Israel Fischer pursued aggressive currency devaluation. His policy worked as a buffer against drops in exports due to the global recession.
Isreal's economy did not suffer nearly as much as the U.S.'s as a result of Fischer's policies.
But still, as of now it appears Yellen is the more more popular choice. She would be the first chairwoman of the Federal Reserve, but outside that there is little optimism for the Fed's success as long as fiscal policy is gridlocked by political motives.