Considerable debate has surfaced lately as to the identity of the next Federal Reserve chairman and to what degree any of the leading candidates might alter the Fed’s existing monetary policy.

The intense speculation as to Fed Chairman Ben Bernanke’s replacement was sparked by President Obama’s comment in June that Bernanke had “stayed a lot longer than he wanted or he was supposed to,” suggesting he would not be nominated for another term at the end of the year.

But despite all the sound and fury, most of the so-called top picks are supportive of stimulus measures to boost the US economic recovery.

And although they may differ slightly in their own economic philosophies, you’ll find they are generally in agreement with the Fed’s application of the “Phillips Curve,” which embodies Bernanke’s idea that inflation will bring down unemployment.

The Phillips Curve demonstrates an empirical regularity between low unemployment and high inflation, and vice-versa, which could in theory be exploited to stabilize the business cycle.

Managing the Fed Mandate

The question for the top Fed picks is not so much whether these candidates differ ideologically. After all, it’s illogical to expect President Obama to nominate a candidate who would deviate dramatically from the Fed’s multi-year policy guidance.

The question is how they would react, if inflation targets were to exceed their threshold at a time when unemployment targets were not met. Would they truly be inflation hawks—or would they let inflation run away?

The Fed in 2012 adopted a new dual-mandate. It committed to keeping the Fed funds rate between zero and 0.25 percent, as long as unemployment didn’t fall below 6.5 percent (now raised to 7 percent) and inflation didn’t exceed 2.5 percent.

While the Fed’s dual mandate has always included inflation and unemployment, this explicit commitment to numerical thresholds on both flanks constitutes a marked evolution of Fed policy. It reflects the explicit introduction of the neo-Keynesian Phillips Curve into the Fed’s monetary policy framework.

As Benjamin Shepherd, chief investment strategist of The Inflation Survival Letter, discusses in this month’s inaugural issue of the newsletter: “The major danger here is that the Fed will be slow in stepping back its asset purchases and bumping up interest rates. That very hesitancy was a major driver of the weak dollar, which helped generate the sharp uptick in inflation we experienced between 2006 and 2008. Cheap money also helped inflate the real estate bubble, which was a root cause of the Great Recession.”

A Question of Independence

Whoever he or she turns out to be, the new Fed chief’s independence from the Obama administration will be a big factor determining whether the central bank will be slow to contain inflation.

Some cynics suggest Bernanke lost his job over his expressed intentions to taper stimulus next year, resetting the support threshold to 7 percent from 6.5 percent unemployment. In recent days, in response to the volatility created by his comments of a planned tapering, Bernanke has scaled back expectations of when the stimulus would end.

Fed independence is not the sole focus of this column, but the Fed’s fortitude in the face of political pressure is a critical issue that should be observed over the next few years to discern how hawkish the central bank will be, particularly because inflation targeting requires several prerequisites.

A recent International Monetary Fund paper aptly summarizes these requirements:

“The first [requirement] is a central bank able to conduct monetary policy with some degree of independence. No central bank can be entirely independent of government influence, but it must be free in choosing the instruments to achieve the rate of inflation that the government deems appropriate. To comply with this requirement, a country cannot exhibit symptoms of ‘fiscal dominance’—that is, fiscal policy considerations cannot dictate monetary policy.

“Freedom from fiscal dominance implies that government borrowing from the central bank is low or nil, and that domestic financial markets have enough depth to absorb placements of public debt, such as Treasury bills.

“It also implies that the government has a broad revenue base and does not have to rely systematically and significantly on revenues from ‘seigniorage’—revenues that accrue to the government from having the monopoly on issuing domestic money (the difference, for example, between the cost of paper and printing and the face value of a $100 bill, which can represent perhaps as much as $99.95 profit for the government).

“If fiscal dominance exists, inflationary pressures of a fiscal origin will undermine the effectiveness of monetary policy by obliging the central bank to accommodate the demands of the government, say, by easing interest rates to achieve fiscal goals.”

A Review of the Top Candidates

As stated above, investors must ask these important questions with regard to the current crop of Fed chief candidates: their position on stimulus (which seems in favor of stimulus, across those in the running); their freedom from interference from the Obama administration; and whether they would be hawkish enough to contain inflation when it occurs. Here’s a rundown of the top contenders:

1. Janet Yellen, Ph.D economics, Yale University would continue Ben Bernanke’s economic policies. Currently the Vice Chairman of the Board of Governors of the Federal Reserve System, Yellen stated in March: “The level of accommodation is increasing as long as those purchases continue … and I think the [Federal Open Market Committee] has made it very clear, but let me try to emphasize again my own view that once accommodation has peaked … the committee’s intention is to leave that accommodation in place until well into the recovery.”

2. Lawrence Summers, Ph.D., Harvard University, known for his temper, is a polarizing figure. At times, he sounds like a moderate Republican who wants to let private markets function with minimal government intervention, at least when times are good. But nevertheless, he also is a left-leaning Keynesian economist and supporter of stimulus spending. As a former economic advisor to President Obama, he would likely pursue policies that are favorable to the administration.

3. Timothy Geithner, MA, International Economics and East Asian studies, Johns Hopkins University, is the one non-Ph.D name that is being considered. He is largely viewed as someone who would carry the Obama administration’s flag into Federal Reserve deliberations.

4. Christina Romer, Ph.D., Massachusetts Institute of Technology seems as though she would bring a new order to the Federal Reserve. She has said recently that “regime shift” is needed at central banks when things get really bad; they need to make an “aggressive change” that “makes people wake up” and realize “this is a new day.”

However, most analysts see Romer as more of a bureaucrat that only a few years ago was an economic adviser to President Obama and would likely toe the party line. A Keynesian economist, she has said about stimulus:

“If the Fed doesn’t want to do something as drastic as adopting a new operating procedure, it could at least make any smaller actions it takes more effective. The previous rounds of quantitative easing may have done little to improve expectations because their size and duration were limited in advance. If the Fed does another round, it should leave the overall size and end date unspecified. Or, better yet, the ultimate scale and timing could be tied to the goals the Fed wants to achieve.”

Richard Stavros is an investment analyst at The Inflation Survival Letter as well as at other affiliated publications under the Investing Daily umbrella, including Personal Finance and Utility Forecaster.