Top Israeli Central Banker is The Real Power In The Federal Reserve

Politico – by Kate Davidson

Stanley Fischer came to the Federal Reserve in the spring with a higher profile than any vice chairman in the 100-year history of the institution after leading Israel’s central bank and holding top jobs at the International Monetary Fund and World Bank.

Fed Chair Janet Yellen pushed for him to be her No. 2 in a move that was viewed as a show of confidence and strength as she prepares to lead the Fed through one of it most challenging periods, managing the wind down of massive stimulus programs put in place following the financial crisis.  

The pairing was dubbed a central banking “dream team” by Fed watchers.

In his first six months on the job, Fischer has rewarded Yellen’s confidence by helping communicate the Fed’s policy moves to nervous financial markets while publicly defending the central bank against a growing chorus of critics. To many on Wall Street he helped alleviate worries about the lack of direct financial market involvement on her résumé.

“Stan Fischer has market experience and goodwill that Chair Yellen doesn’t have,” said Jack Ablin, chief investment officer at BMO Private Bank. “It’s not a slam on the Fed chairman, it’s simply different experience.”

In the coming year, his ability to help Yellen and the Fed keep the economy humming and Wall Street calm while also dealing with pressure from emboldened congressional skeptics will be pivotal to the success of the central bank’s policy decisions and to how much of its cherished political independence can be maintained.

“I see him as potentially a very helpful adjunct to the chair,” said Donald Kohn, a senior fellow at the Brookings Institution and a former Fed vice chairman. “I think because of his prominence and because of his experience, particularly in the international arena, he might be more noticeable than past vice chairmen.”

Fischer, 71, is expected to play a big role as a chief defender of the Fed, which faces intense scrutiny in the coming year from a Republican-controlled Congress as well as high-profile progressive Democrats, such as Sen. Elizabeth Warren of Massachusetts.

While Yellen must strike a careful balance when it comes to Congress, Fischer will be freer to push back against attacks from Capitol Hill.

“Just his sheer experience and authority and his wonderful demeanor and his credibility allows him to interact with the political class in a way which explains what the Fed is thinking, how it’s approaching its methodologies, and its mind-set as it’s looking to 2015,” said Timothy Adams, president of the Institute of International Finance and a Treasury official in the George W. Bush administration.

Fischer has already done some of this pushing back, warning that GOP proposals requiring greater disclosure of Fed policy decisions would weaken the central bank. He’s also called it “an illusion” that Fed examiners can know everything happening within the banks they supervise — an apparent swipe at criticism that the central bank hasn’t done enough to police Wall Street following accusations from a former supervisor that the New York Fed went easy on Goldman Sachs on several occasions.

Fischer may find liberal Democrats to be among his toughest audiences.

While his experience and connections within the world of finance are his greatest strength — he mentored officials such as former Fed Chairman Ben Bernanke and European Central Bank President Mario Draghi as a professor at MIT — his three-year stint at Citigroup has worried Wall Street critics, such as Warren, who complain that President Barack Obama has nominated too many people for economic jobs who have spent time at big banks.

Asked whether he was pleased with Fischer’s performance so far, Sen. Sherrod Brown of Ohio, who will become the top Democrat on the Senate Banking Committee next year, said it’s too early to tell.

“I like the meeting that he and Yellen and [Govs. Lael] Brainard and [Jerome] Powell did with learning more about the real economy,” Brown said, referring to a meeting the Fed officials had with community and labor groups in November.

“That’s not a real high bar, but it’s a good thing they’re doing that,” Brown said. “I hope they do more of it.”

Fischer, a native of Zambia and a dual citizen of the United States and Israel, has also distinguished himself early in his tenure by carrying out his duties with an ease and aplomb that eludes most Fed newcomers, making clear he’s no buttoned-up central banker worried his every utterance will send markets into a tizzy.

While most Fed governors come off as carefully scripted, Fischer is more likely to speak off the cuff than his predecessors, and to say exactly in public what he would in private.

For example, he popped up earlier this month at an event at the Peterson Institute for International Economics. Seated at a roundtable in the middle of the room, Fischer could have been mistaken for another conference participant. But when handed the microphone, he weighed in on international regulators, political pressure on central bankers and even on lobbying by big U.S. banks.

“I thought when Dodd-Frank started that the banks would not succeed in influencing it, having lost all the prestige that they lost,” he said. “And boy was I wrong.”

Not only did the comments raise eyebrows for their frankness, the appearance itself was highly unusual, as even the most banal of public remarks by Fed governors are always listed on a weekly schedule of public appearances issued by the Fed’s public affairs office.

While Fischer is hardly a Fed governor gone rogue, his straightforward style stands in contrast to others at an institution not exactly known for its candor.

“I don’t think he’s got anything to prove,” said Adams. “He’s part of the pantheon of global financial and economic experts, and I think taking this job at this point in his career gives him the freedom and the flexibility to be intellectually honest and to be thoughtful.”

In an environment in which everything a Fed governor says is so heavily scrutinized, Fischer does run the risk of making a gaffe.

At a Fed board meeting last month, he disclosed that JPMorgan Chase was the only big bank that would not yet meet new rules the Fed was proposing to strengthen capital — an apparently inadvertent slip of information that Fed staff had not intended to publicize. But even industry officials described the disclosure as a “toe stub”— more a breach of Fed etiquette than a market-moving revelation.

While Fischer is viewed as a close confidant of Yellen, Fed watchers are also careful to note that he is not simply there to rubber-stamp what the chair says.

He’s considered an independent thinker with his own portfolio — including leading a new committee overseeing stability of the financial system — who happens to share Yellen’s views.

“The distinction might be subtle but is important,” said Roberto Perli, head of global policy research for Cornerstone Macro.

One example, Perli said, is Fischer’s focus on how Fed policies that are meant to stimulate the U.S. economy are spilling over onto the rest of the world, and what that means for U.S. policymakers.

“To make coherent policy choices, we have to take these feedback effects into account,” Fischer said in an October speech at the IMF in Washington.

The speech, one of his most significant to date, shows how he is taking on an important behind-the-scenes role as an intermediary between the Fed and the rest of the world.

Fischer has also taken on the mantle of leading the Federal Open Market Committee’s communications subcommittee, which guides the way the central bank broadcasts its future policy actions to the public.

In early December, Fischer signaled that Fed officials were close to removing language from its forward guidance vowing to keep interest rates low “for a considerable period of time,” which they did at their latest meeting. The statement was interpreted as indifference from Fischer toward a central piece of the message crafted under Yellen when she served as vice chairman to Bernanke.

Fischer has also been tasked with leading a new committee monitoring risks to the financial system, a critical responsibility that many view as the Fed’s new “third” mandate, in addition to its traditional dual mandate to promote price stability and full employment.

It’s through this job that Fischer will likely have a big say in how the Fed regulates Wall Street and financial markets — including the growing shadow-banking sector — and he’s made clear that he doesn’t have a lot of sympathy for firms that complain about too much regulation.

“You would think that we didn’t have this banking crisis and everything was going well and then the Fed somehow got involved,” he said. “There was a huge mess that had to be cleaned up.”

For now, Fischer appears to be thoroughly enjoying being the Fed’s No. 2 official.

At an event hosted by The Wall Street Journal in December, a piece of the stage set came crashing down behind Fischer as he was being interviewed about the Fed’s quantitative easing program.

Someone joked that it was a sign about raising interest rates. Fischer — perhaps in a self-deprecating reference to his freewheeling style — had another take.

“Not to embarrass anybody, but Michelle Smith of the Fed told me if I did something, she’s going to press the fire alarm,” Fischer said referring to a top aide to the Fed board. “I guess it’s just happened, Michelle.”

Ben White, Jon Prior and Zachary Warmbrodt contributed to this report.

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