Obama to Choose Powell, Stein for Fed Board

By Scott Lanman and Roger Runningen - Dec 28, 2011 3:39 AM GMT+0700

President Barack Obama said he will nominate two former U.S. Treasury Department officials for the Federal Reserve Board, including one who served in a Republican administration.

Jerome Powell, an attorney who was a Treasury undersecretary for former President George H.W. Bush, and Jeremy Stein, a Harvard University economist who has advised the current administration, are Obama’s picks.

Pairing candidates who served under both parties may help ease approval by a Senate where the Democrats’ majority narrowed last year, letting Republicans block administration nominees. The Fed’s seven-member Board of Governors has two vacancies. While the term of Elizabeth Duke, an appointee of President George W. Bush, expires Jan. 31, she can continue to serve until a successor is appointed.

Referring to the nominees, Obama said today in a statement that “their distinguished backgrounds and experience coupled with their impressive knowledge of economic and monetary policy make them tremendously qualified.”

Senate Banking Committee Chairman Tim Johnson, a South Dakota Democrat, said in an e-mailed statement that he plans to move the nominations “in a timely manner” and wants to schedule a hearing soon after lawmakers reconvene in Washington. Senators plan to return to business Jan. 23.

Powell, 58, and Stein, 51, were reported by media organizations including Bloomberg News to be under White House consideration for the Fed slots.

Former Economist

If confirmed as Fed governors, the pair probably won’t sway interest-rate decisions under Chairman Ben S. Bernanke, said Roberto Perli, a former economist in the Fed’s Division of Monetary Affairs. Fed officials have said they’re considering more ways to lower borrowing costs.

The number of voting policy makers who could oppose Bernanke will fall to one in 2012 from three in 2011, Perli said. The Fed chairman gained majorities for his decisions this year.

“I don’t think that the addition of two members, whichever way they might lean, will dramatically change the course of monetary policy,” said Perli, now a managing director at International Strategy & Investment Group in Washington. At the same time, the nominees’ skills and experience in economics and financial markets will benefit the central bank, he said.

Yields on 10-year Treasuries remained lower after the announcement. The rate fell to 2.01 percent from 2.03 percent on Dec. 23. U.S. markets were closed yesterday.

Potential Nominee

Obama administration officials regrouped to identify Fed candidates after Peter Diamond, a Nobel Prize-winning economist, withdrew his nomination to the board in June in the face of Republican opposition. Richard Clarida, a potential nominee who was a Treasury official under George W. Bush, pulled out of consideration in August.

Perli declined to predict whether Stein and Powell will win Senate approval, while saying the Democratic-Republican pairing may help their odds.

A spokesman for Alabama Senator Richard Shelby, the Republican whose opposition helped sink Diamond’s candidacy, didn’t respond to a request for comment.

While Powell has Republican ties, he indicated in May that he disagreed at the time with some Republicans’ strategy of threatening to oppose an increase in the U.S. debt limit and risking default unless Democrats agreed to spending cuts.

Lead Author

As a visiting scholar at the Bipartisan Policy Center in Washington, Powell was lead author of a June analysis saying failure to increase the ceiling would result in an immediate 44 percent cut in federal spending, creating a “chaotic” situation and “public uproar.”

“I am by any fair reckoning a fiscal conservative,” Powell, who goes by Jay, said in a May 16 interview with Bloomberg Television. At the same time, allowing a default is “just not a risk that you run.”

“That doesn’t mean that you don’t negotiate very hard to get additional spending cuts and get the deficit under control,” he said. “You do. But that crosses the line into hostage taking, I’m afraid, and is just tactically unacceptable.”

Powell, whose term would run through Jan. 31, 2014, has spent most of his career outside government, spanning the worlds of private equity, investment banking and law. He would add financial-markets experience missing since Kevin Warsh, 41, left the Fed board in April.

Based in Washington

Powell was a partner at the Carlyle Group, the Washington- based manager of private-equity funds, from 1997 to 2005 and was an investment banker in the 1980s with Dillon Read and Co. after working as an attorney following his 1979 graduation from Georgetown University’s law school. He holds a bachelor’s degree from Princeton University.

Powell joined the Treasury as an assistant secretary in 1990 and was appointed an undersecretary in 1992. While at the department, he helped revamp government-bond auction procedures after Salomon Brothers admitted to bid-rigging.

Stein’s term would end Jan. 31, 2018. He served in the Obama administration from February to July 2009 as a senior adviser to the Treasury secretary and on the staff of the National Economic Council, according to Harvard’s website. He was also a senior staff economist on President George H.W. Bush’s Council of Economic Advisers from September 1989 to June 1990, leaving just before Powell was nominated to a Treasury post.

Financial Crisis

Stein said in a Sept. 29, 2008, interview with Bloomberg Television that the Fed’s policies were partly responsible for the subprime mortgage-induced financial crisis.

“The Fed in the early part of this decade would have been better had they been a little bit more aggressive in dealing with the housing bubble in its early stages, both through interest-rate policy and potentially through worrying a little bit more about the buildup of all this leverage on bank balance sheets,” Stein said on the day House lawmakers initially rejected the $700 billion Troubled Asset Relief Program. The vote sent U.S. stocks tumbling 8.8 percent.

Bernanke, 58, whose second term as chairman expires in January 2014, said in a January 2010 speech that the central bank’s low interest rates didn’t cause the housing bubble and that better regulation would have been more effective in limiting the boom.

Capital Allocation

Like Bernanke and several other senior Fed officials, Stein holds a doctorate in economics from the Massachusetts Institute of Technology. Stein’s research topics include corporate investment and financing decisions, risk management, stock- market efficiency and capital allocation inside companies.

Stein, who has served on the New York Fed’s Financial Advisory Roundtable since 2006, rejoined Harvard as an economics professor in 2000. He worked as an assistant professor of finance at the business school from 1987 to 1990. Stein taught at MIT from 1990 to 2000.

Stein also worked as an intern at Goldman Sachs (GS) and Co. from July 1986 to June 1987, according to his curriculum vitae posted on Harvard’s website.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net