December 11, 2013 / 7:51 PM / 4 years ago

UPDATE 3-Israel's Fischer picked to be next Fed vice chair -source

* White House offered job to former head of Bank of Israel
    * Seen as 'very proactive with dovish bias when necessary'
    * Another chapter in personnel, policy transition at Fed


    By Steven Scheer and Jonathan Spicer
    Dec 11 (Reuters) - Stanley Fischer, who led the Bank of
Israel for eight years until he stepped down in June, has been
asked to be the Federal Reserve's next vice chair once Janet
Yellen takes over as chief of the U.S. central bank, a source
familiar with the issue said on Wednesday. 
    Fischer, 70, is widely respected as one of the world's top
monetary economists. He is seen as a pragmatic policymaker and
has praised the Fed's extraordinary steps to boost the U.S.
economy. At the Massachusetts Institute of Technology, he once
taught current Fed Chairman Ben Bernanke and Mario Draghi, the
European Central Bank president. 
    Yellen, the Fed's vice chair, is expected to win approval
from the U.S. Senate next week to take the reins from Bernanke,
whose term ends in January.
    Fischer, who was born in Zambia and has Israeli and U.S.
dual citizenship, would also need Senate approval if he accepts
the offer from the White House. "He's been offered the job" said
the source, who declined to be named.
    The White House declined to comment. A Fed spokeswoman said
the White House was responsible for nominations.
    Fischer, who could not immediately be reached, has held
top-level posts at the World Bank and the International Monetary
Fund, and was credited with guiding Israel through the global
economic crisis with minimal damage. For the Fed, he would bring
the fresh perspective of an outsider, especially on
communications, yet offer some continuity too.
    He is "difficult to characterize with a term as obtuse as
'hawk' or 'dove' because he takes a balanced, academic approach
to various topics of debate," said Thomas Simons, an economist
at brokerage Jefferies.
    "However, given that he played an instrumental role in
helping Ben Bernanke form his views on monetary economics, his
presence at the Fed would represent some consistency in this
time of transition."
    
    Fischer would arrive at a U.S. central bank starting to
navigate a return to normalcy after taking dramatic and
unprecedented steps to emerge from the Great Recession of
2007-2009. 
    The Fed is now wrestling with the decision of when to scale
back its huge bond-buying program that sought to drive down
long-term borrowing costs and swelled its balance sheet to some
$4 trillion. It buys $85-billion a month in Treasuries and
mortgage bonds in its current, third round of "quantitative
easing," or QE3. 
    At an IMF economic forum on Nov. 8, held in Fischer's honor,
he suggested he is a strong believer in the effectiveness of the
Fed's unconventional policies. 
    "It's very hard to reach the conclusion that the unorthodox
measures are ineffective," Fischer said of the bond buying,
acknowledging the policy is controversial.
    "They appear to be effective and they essentially do that by
working off either the provision of liquidity in markets where
liquidity has effectively dried up, or by changing interest
rates other than the central bank interest rate," he said on a
panel seated next to Bernanke.
    As Fed vice chair, Fischer would have a strong hand in
shaping policy. Yellen, who has held the post since 2010, was a
driving force behind the Fed's adoption last year of an
inflation target, an important policy milestone for the bank.  
    One possible source of tension may be how to telegraph the
Fed's policy intentions. While Yellen and Bernanke have tied a
rate rise to future levels of unemployment and inflation,
Fischer has publicly warned about central banks giving so-called
forward guidance that is too precise.
    "He's going to think outside of the box, he's going to push
the Fed a little bit, and that's not a bad thing," said Diane
Swonk, chief economist at Mesirow Financial in Chicago.
    Fischer "is very cognizant of what you can and can't
communicate, and I'm not sure the Fed is always so sensitive
about that."
    Bloomberg News and Israel's Channel 2 earlier reported
Fischer as the front runner for Fed vice chair.
    If he takes the job, it would be the second time this year a
major central bank made a high-profile hire from abroad. The
Bank of Canada's chief Mark Carney earlier this year became the
first foreigner to lead the Bank of England.    
    
    'NEARING A DECISION'
    The Fed's seven-member board is depleted and risks thinning
further. Elizabeth Duke stepped down in August, Sarah Raskin is
set to leave for a job at the U.S. Treasury, and Bernanke is
expected to depart when his term as chair expires Jan. 31.
    With Yellen set to become the first woman to take the helm,
some economists and investors had speculated that Jeremy Stein,
a well-respected Fed governor and former Harvard professor,
would be tapped to replace her. Some observers expect that he
too could leave and return to Harvard if Fischer steps in.
    Next week, the Fed holds a highly-anticipated policy meeting
at which officials could announce the beginning of the end of
QE3, given the improvement in the U.S. labor market. It will be
Bernanke's second-last as chair.
    Fischer "is a very qualified and very solid vice chair
candidate, and I don't see on what grounds his nomination would
fail," said Roberto Perli, a partner at economic research firm
Cornerstone Macro and a former senior Fed official.
    "He seems to complement and balance Yellen pretty well ...
and he is probably more sensitive than Yellen to financial
stability issues, and that is a good thing."
    Fischer, a naturalized American citizen, quit his job as
head of Israel's central bank on June 30, three years into his
second five-year term.
    Asked about his next job at a conference in Tel Aviv on
Monday, he said: "The advice I received was not to accept a
position until I had waited at least six months, which is in
three weeks, so it seems like I am nearing a decision."
    Once chief economist at the World Bank and then first deputy
managing director of the IMF from 1994 to 2001, Fischer was a
key figure in the IMF's Mexican bailout after the peso crashed
in the mid-1990s and the fund's main firefighter as it sought to
douse the flames of the Asian financial crisis.
    At the time, he negotiated repeatedly with troubled
countries, jetting from one to the next as a financial storm
swept through the world's emerging markets. Robert Rubin, the
influential former U.S. Treasury secretary, once described
Fischer as the "unsung hero" of the crises.
    During his tenure in Israel, the country's economy performed
better than most. Despite a focus on fighting inflation, Fischer
slashed rates and went against his own policy of staying out of
financial markets by buying up tens of billions of dollars to
weaken the shekel and help prop up local exporters.
    While he began cutting rates in 2008 before other major
central banks in a bid to head off the worst of the recession,
he also was among the first to raise them, a year later.
    He "was very proactive with a dovish bias when necessary,"
said Benoit Anne, head of emerging-market strategy at Societe
Generale. "Fischer will bring a valuable awareness of the impact
of Fed policies on the outside word, including emerging markets
(meaning) the process of Fed policy exit may be better managed
from a collateral damage perspective."
    Fischer was a vice chairman of Citigroup prior to joining
the Bank of Israel. He had sought the top job at the IMF in 2011
but was disqualified due to his age.
    If Fischer is nominated and approved by the U.S. Senate in
time to take the reins from Yellen, it would be the first time
in Fed history that the two top posts at the central bank are
filled at the same time.
    The closest to that the Fed has ever come was in 1979, when
Paul Volcker took over as Fed chair less than two weeks after
Vice Chair Frederick H. Schultz started his job.

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