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Fischer, Brainard to push for more activist Fed

Under Secretary of the U.S. Treasury for International Affairs Lael Brainard listens to a question at the 2013 NABE Economic Policy Conference in Washington, March 5, 2013. REUTERS/Larry Downing

By Howard Schneider and Michael Flaherty

WASHINGTON (Reuters) - The two new nominees to the Federal Reserve's Board of Governors are expected to push for an expanded Fed role in managing the U.S. economy, working to replace the current raft of programs that resulted from the financial crisis with more permanent tools.

The arrival of former Bank of Israel Governor Stanley Fischer and former U.S. Treasury official Lael Brainard will add two strong voices to back Chair Janet Yellen's view that loose monetary policy needs to be extended to turn around a slack labor market.

Fischer intervened directly in Israel's mortgage market to tackle a real estate bubble, while Brainard pushed EU governments hard for more aggressive action from the European Central Bank during the euro zone crisis.

Interviews with former colleagues and a review of their public statements and published material also suggest both will want the Fed to remain in activist mode long after its current programs wind down and its bloated balance sheet shrinks.

How they influence the U.S. central bank is a critically important question for investors, who are searching for clues on when the Fed will lift interest rates from near zero, where they've been since late 2008. It is a debate that may well be the defining one of Yellen's tenure.

In coming months, the Fed may have to remake the tools it uses to control interest rates, choose whether to liquidate or hold the $4 trillion of investments it has on its balance sheet, and decide when to begin pushing borrowing costs higher. It will also need to make longer-term decisions about how closely it wants to be involved in monitoring and shaping financial markets to guard against another systemic crisis.

Fischer, who is nominated to be Fed vice chairman, is expected from day one to pursue his belief that central banks need to develop new powers and tools to prevent future crises.

"What Fischer can bring to the table is some very valuable practical experience guided by a strong analytical framework," said David Stockton, the Fed's former research director and now a senior fellow at the Peterson Institute for International Economics.

Fischer, 70, sees "a lot of work to be done" to get central banks to integrate concerns about financial stability into their monetary policy decisions, said Stockton. "As he has looked at the crisis and thought about the advanced economies, he has seen there are some serious lapses."

Divisions within the Fed over how long to extend its activist approach are likely to increase. A number of officials, including Kansas City Federal Reserve Bank President Esther George and Richmond Fed chief Jeffrey Lacker, have warned about the threats that might develop if current policy is kept in place too long, arguing it should shift back to a more traditional, less interventionist role. St. Louis Fed President James Bullard said last week he felt inflation was starting to gain traction, raising the risks of keeping easy monetary policy in place too long.

Fischer and Brainard are unlikely to back any proposals to push the Fed back into a corner.

According to colleagues who have worked closely with him, Fischer's concerns over financial stability have become steadily more important to his thinking - to the point where he feels central banks should stand ready to intervene in markets in a way likely to draw opposition from those who prefer a hands-off approach.

In Israel, he used a variety of tactics to isolate and deflate what he concluded was a risky asset bubble in real estate, including imposing higher loan-to-value requirements for lending that targeted the entire mortgage market.

By contrast, the new powers and responsibilities established for the Fed under the Dodd-Frank financial reforms have dealt with regulation of individual banks, not rendering judgment on whether specific asset markets are growing too fast.

"The central bank has to be one of the central elements in building the system of macro prudential supervision," Fischer said last fall at a conference at the International Monetary Fund, where he served as the No. 2 official in the 1990s, playing a leading role in battling the Asian financial crisis.

The regulatory system, he argued, can no longer concentrate just on standards for individual financial institutions, but instead "needs to ask itself what are the interactions within the financial system that could lead to problems over and beyond those that would arise for individual banks."

Fischer and Brainard declined to comment for this article through a Fed spokesperson, citing their pending nominations. The Senate is expected to approved Fischer's nomination this week. It is unclear when it might vote to confirm Brainard.


Like Fischer, who was born in what is now Zambia, Brainard spent her early years overseas, as the daughter of a diplomat posted to Germany and Poland at the end of the Cold War. A Washington fixture, she served in both the Clinton and Obama administrations and spent the intervening years at the Brookings Institution, a top think tank.

Brainard, 52, reached the upper ranks of the U.S. Treasury as undersecretary for international affairs, but does not have as deep a background in monetary policy as Fischer.

Her work in Washington has been less that of a technical economist and more about the political economy of globalization and international institutions.

But during the crisis that threatened to break up the euro zone while she was at Treasury, she voiced an expansive faith in what central banks can and ought to do, often serving as the point person in the Obama administration's efforts to goad Europe into stronger action.

European officials who worked with her during that period, as well as U.S. government colleagues, describe a tough bureaucratic infighter - someone not prone to easy compromise once she has made up her mind. In sometimes heated meetings, Brainard encouraged European officials to throw out their existing rule book and radically expand the European Central Bank's role.

"There was this whole idea of the 'bazooka,'" or using the central bank's resources to overwhelm concerns that one or more European countries might default, said Jean Pisani-Ferry, former head of the Bruegel think tank in Belgium and now an adviser to the French government. "That basically came from them," he said in reference to then Treasury Secretary Timothy Geithner and Brainard.

Former colleagues tell of battles she waged within the administration to increase U.S. assistance to the World Bank, or beat back what was seen as an effort by the State Department to intrude on Treasury's oversight of the bank and the IMF.

"She can be very assertive where she has strong views," said Robert Hormats, vice chairman of Kissinger Associates and a former senior State Department official.

Both Brainard and Fischer are expected to deepen Fed discussion of how its decisions may impact the global economy and vigorously defend U.S. policy overseas.

Fischer's time as a central banker came as Israel was buffeted by a crisis that emanated from the United States. He certified his standing during that time as an economist both rooted in tradition - he literally wrote the book on modern macroeconomics - and willing to discard convention.

"He'll use whatever tools are available," said former Fed Vice Chairman Donald Kohn.

(Reporting by Howard Schneider and Michael Flaherty; Editing by Martin Howell)