Next Fed Chief's Big Test: Quelling Voices Of Dissent

During nearly eight years running the Federal Reserve, Chairman Ben Bernanke's signature style has been managing by consensus. He has given colleagues wide latitude to speak their minds at closed-door Fed meetings and in public. He also has worked behind the scenes to find common ground among the 18 other strong-willed Fed governors and regional bank presidents when he has had to make big policy decisions.

With Mr. Bernanke expected to give up the helm when his term ends in January, his leadership style, and the style of his possible successors, warrant extra scrutiny. An already divided Fed could become more fractious when Mr. Bernanke departs, with important implications for the central bank, markets and the economy.

Two leading contenders to succeed Mr. Bernanke, Lawrence Summers and Janet Yellen, tend to have strong views. Ms. Yellen has a clearly staked out position within the Fed as a strong advocate for easy-money policies. Mr. Summers has a reputation as a tough-minded and at times aggressive debater. Either might push harder to advance his or her own positions, and face more pushback from other officials in return, making the Fed a feistier place.

That could result in quicker, bolder central-bank policy actions at times. It also could lead to more market-roiling rancor from inside the Fed or uncertainty about whether the Fed's new leader can see policies through to completion.

Neither Ms. Yellen, the Fed's vice chairwoman, nor Mr. Summers, a former Treasury secretary, have said how they would seek to forge consensus at the Fed if they wind up leading it. Both declined to comment.

Leadership style is especially important now. The Fed makes public commitments about what it will do about interest rates in the future, hoping that guidance will influence economic decisions by investors, businesses and individuals. These commitments may appear unreliable if they appear to lack broad support inside the Fed.'Forward guidance and communication only works if it is believed,' said Lewis Alexander, chief U.S. economist at Nomura Securities. 'If it is not supported by a strong consensus on the committee, it is hard to have faith in it.'

Mr. Bernanke has worked hard behind the scenes at the Fed to bring officials together on tough policy choices. In late 2010, when the Fed launched a $600 billion bond-buying program that divided officials, he managed to push through the program with only one formal dissent. Last year, as the Fed prepared to launch another bond-buying program, he called colleagues at home and on weekends to bring them on board with his policy, according to people who were part of the discussions.

There were downsides to his approach. In both cases, it took months for officials to talk through their differences and reach agreement, and the compromises that emerged sometimes displeased investors eager for quicker, bolder action. Moreover, as part of Mr. Bernanke's open-microphone style, other Fed officials have felt free to air their differences publicly, sometimes confusing the investors about the Fed's intentions.

Still, the approach built Mr. Bernanke a much-needed reservoir of goodwill among his colleagues.

'If it's a committee-based decision, you get a stronger decision in the end, and you don't put all the weight on one person trying to call the shots,' said James Bullard, president of the St. Louis Fed, at a recent media briefing. Mr. Bullard has sometimes disagreed with Mr. Bernanke.The Fed hasn't always worked this way. During Alan Greenspan's 18 years as chairman, Fed officials often deferred to him or expressed their differences more privately. Mr. Bernanke 'wanted to reduce the cult of personality around the Fed,' Mr. Bullard said.

Former Fed Chairman Paul Volcker, on the other hand, battled to contain internal opposition. In 1986, he threatened to resign when four Reagan appointees, wanting to push down interest rates and weaken the dollar, voted against him on an interest-rate decision. In 1979, he won a 4-3 decision to raise rates, a victory that spooked markets because it was so narrow.

When a Fed chairman doesn't command strong majorities, it undermines his voice domestically and globally and creates uncertainty about policy, said William Silber, who documented those episodes in the Volcker biography, 'Volcker: The Triumph of Persistence.' 'Disagreement is healthy,' Mr. Silber said. 'Uncertainty is universally bad. It raises the cost of everything.'

In a Wall Street Journal survey of private economists, 23 said Ms. Yellen would be most adept at managing consensus, while one said Mr. Summers. Twelve said former Vice Chairman Donald Kohn would be best at this.Ms. Yellen has a more low-key style than Mr. Summers. Still, her strong advocacy of the Fed's easy-money policies put her at odds with colleagues who have resisted the central bank's bond-buying programs.

Whoever gets the job of leading this cacophonous group could find the task enormously challenging.