Is the U.S. economy likely to be managed any differently by new Federal Reserve Board chairman Janet Yellen and vice chairman Stanley Fischer than it was by Ben Bernanke? The post-Bernanke Fed was the subject of an extended talk by former Fed Governor Frederic Mishkin at a recent IMCA conference in New York.
Mishkin, who studied under Fischer at MIT, seemed to think America is fortunate to have these two scholars who complement each other almost perfectly. While Janet Yellen is a “bleeding heart liberal,” she is also acutely aware of how viciously inflation can curb the spending power of the most vulnerable segments of society like the poor and the elderly. Consequently, she is likely to tolerate only small deviations in inflation from her 2% target.

Fischer, who was born in Zambia and managed Israel’s central bank from 2005 to 2013, is a towering intellect in the world of international finance who has served at both the IMF and the World Bank, Mishkin told attendees. Virtually everyone in the economics profession acknowledges his stature, though Fischer has never won a Nobel prize, unlike another one of his former students, the highly opinionated, angry lefty Paul Krugman.

Expect Fischer to remain vigilant, looking out on the horizon for signs of an overheating economy or a credit bubble characterized by lax consumer borrowing or covenant-lite business loans. We’re nowhere near that point, but signs of excess typically start surfacing several years before business cycles end. If Fischer is as perceptive at spotting those signals as Mishkin claims he is and Yellen listens, they may be able to engineer a soft landing later in the decade that sustains an economic expansion already five years old as of today.

The smart money is betting that Yellen and Fischer will seek to exit the QE experiment sooner rather than later, even if they plan to keep interest rates very low for years to come. Why? Because the Fed has quintupled its balance and could suffer huge losses if interest rates spike sharply. Clearly, it doesn’t want to go to Congress for its own bailout.

Listening to Mishkin, I couldn’t help but ask myself why—if all these central banking wizards are as brilliant as they collectively think they are—didn’t any of them see the financial crisis unfolding in 2008 as dangerously as it did. That fact alone means they all should maintain a little humility.

Evan Simonoff, Editor-in-Chief
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