President Barack Obama has announced Janet Yellen as his nomination to replace Ben Bernanke as Chair of the U.S. Federal Reserve. The appointment, which takes effect in January 2014, still has to be ratified by the Senate.
The Yellen nomination comes after a time of especially contentious lobbying by several candidates for the job. As the number of public options dwindled to just Yellen and former Secretary of the Treasury Larry Summers, the debate became bitter and reflective of the philosophical gulf that seemingly marks every hire in Washington these days all the way down to Assistant Night Manager at the Capitol Hill Yogen Fruz.
While there’s no denying a fact of modern political life is the process of various camps lobbying for their woman to get the role, the efforts supporting Yellen were more subtle and in the background than those both in support of and against Larry Summers.
This is assuredly due to Summers commanding presence, his fearlessness in taking on large tasks and in making strong statements, his open lobbying for the role, and his public roles at Harvard and in corporate America.
It is also because of the strong opinions many have about Summers past effectiveness in those public roles and whether or not his stances are beneficial for the domestic and global economies. Not a fan of Larry Summers, Bankless Times has previously published an editorial that was not so much an endorsement of Janet Yellen, but more of a plea to not hire Summers, an architect and ongoing proponent of the lack of market supervision that was a key reason the markets crashed and the world entered recession.
Janet Yellen has shown the ability to learn from extraordinary circumstances and to adapt her philosophy when approaching the problem at hand. When the 2008 crisis struck, Yellen was president of the San Francisco Fed. She became frustrated with what she saw as the lack of responsibility shown by the architects of the disaster in accepting their role and to take steps to mitigate the results.
“This experience has strongly inclined me toward tougher standards and built-in rules that will kick into effect automatically when things like this happen that make tightening up a less discretionary matter,” Yellen testified at the Financial Crisis Inquiry Commission in 2010.
Many who know Yellen confirm that her approach is more of an academic looking for answers than a partisan who is beholden to a particular viewpoint. Christina Romer, a former Chair of President Obama’s Council of Economic Advisers has known Janet Yellen for decades and is one of the people who has publicly praised this flexible approach and the benefits it offers Yellen as Chair of the Fed. Joining her in this sentiment are journalists and academics from across the philosophical spectrum.
The measured academic approach means Yellen will most likely not make snap judgments, that, while they may placate jittery markets that seem to value speed more than accuracy, ultimately are more prone to damaging the economy. She has recently sided with Bernanke on delaying tapering until she sees clearer signs of a healthy and prolonged economic recovery.
Janet Yellen also has a consistent and narrow view on inflation. Experienced enough to remember the economic hits of the 60’s and 70’s, Yellen stated in a 2011 speech that the Fed should “never again repeat the experience …when the Federal Reserve did not respond forcefully enough to rising inflation.”
Just as she has spoken about the damage high inflation can cause, Yellen has also argued about the same results from low inflation. During her time as a Fed governor in the mid-1990’s, Yellen took on Alan Greenspan’s desire to keep inflation too low. While an accepted fact now, it was less so then. In 1996 she urged Greenspan to hike short-term interest rates in an effort to rein in a thriving economy that threatened to spawn soaring inflation rates. In this she is seen as being hawkish should the situation call for a rate hike, according to Dr. Tayyeb Shabbir, Professor of Finance, Director, Institute of Entrepreneurship, California State University Dominguez Hills. “(As long as) it is done when the time is right and not merely for the sake of breaking the cast a la Miley Cyrus.”
The markets like familiarity, clarity and comfort and Janet Yellen has a proven history on all counts. She is widely credited as being the most accurate forecaster at the Fed. A Wall Street Journal analysis of all officials cumulative forecasts between 2009 and 2013 found that Yellen was the best in predicting future events.
Continuity should not be much of an issue, as Janet Yellen often held similar opinions as Bernanke on many issues. The continuity she offers during this turbulent period is one of the biggest pluses Janet Yellen brings to the role, according to Dr. Shabbir. “A Yellen Fed will be quite similar to what a third term Bernanke Fed would have looked like.”
These similarities include the use of unemployment for a benchmark of QE. Unemployment is the one area Janet Yellen is most passionate about. It makes up a significant percentage of her research and is reflected in her public comments on the issue that go beyond academia and resonate in real America.
In a speech given on February 11, Yellen capsulized why there is such an intensive focus on unemployment as a benchmark for a healthy recovery while giving a clear indication that a Yellen-led Fed will continue on this path:
“With so many people today unable to find work, it might seem odd to highlight such an ambitious and distant goal for employment. I do so because the gulf between maximum employment and the very difficult conditions workers face today helps explain the urgency behind the Federal Reserve’s ongoing efforts to strengthen the recovery.”
Later in that same speech she spoke in real terms about unemployment’s effect on today’s America:
“The poverty rate has risen sharply since the onset of the recession…and stands at 15 percent of the population, significantly above the average of the past three decades…Labor’s share of income…remains near the postwar low reached in 2011.”
She stated those wages struggle to match the cost of living, leaving a greater number of working poor and those barely getting by.
The struggles are even greater for some. “Compared to the (overall) 7.9% rate (at the time of the speech), the unemployment rate for African Americans is 13.8 percent…for those without a high school diploma 12 percent, young people 16 to 19 years old 23.4 percent.”
She noted longer periods of unemployment increase the risk of homelessness, skills erosion and loss of contacts that can help one access the hidden job market.
These are the continuing challenges facing Janet Yellen as she assumes the lead role. A key part of this will be explaining the rationale for decisions and explaining what future role they will have. Yellen has frequently received praise for her communication skills and her understanding of the role they play in calming skitterish markets.
This marks a welcome departure from Bernanke, who was seemingly less comfortable with a public role or less cognizant of the effect perceived uncertainty had on the markets. Bernanke himself recognized Yellen’s skill in this area when in 2010 he asked her to chair an internal communications committee that improved the Fed’s external communications capabilities. Among the results were the publication of long range plans, consistent press conferences and increased use of forward guidance.
Kudos for Yellen’s communication skills have also come from primary dealers who, in two separate surveys taken last year cited several of her speeches that increased their understanding of policy direction.
A significant influence on Yellen’s leadership will be the actual makeup of the Fed itself as several changes have happened or are imminent. Elizabeth Duke resigned from the board this past August. A second member, Sarah Bloom Raskin, is President Obama’s nominee for the second highest j0b at the Treasury and is essentially in limbo. Jerome Powell is a third member who may soon leave, as his term expires in January. A fourth, Jeremy Stein, has to decide by May whether or not to stay with the Fed or return to his faculty position at Harvard.
These four will be joined in the Fed’s alumni section by the Cleveland Fed President, Sandra Pianalto, who is resigning early in 2014. This leaves up to five openings that need to be filled within the next seven months.
Given the fractious relationship in Washington, one assumes any appointment will be met with opposition, rational or otherwise. How hard will it be to fill so many vacant seats in this environment, or will we be waiting until the next (Chelsea) Clinton administration? “Since each nominee will need Senate confirmation, a compromise may be in order if the Obama administration would like to successfully fill all the vacancies during this term,” offered Dr. Shabbir.
Compromise appointments may occur that bring voices from different spots on the spectrum aboard. While not a bad thing, if these appointments bring the spite and hatred reflected in much of the current debate, Yellen’s mettle and leadership will be immediately tested. Dr. Shabbir believes Yellen is up to the task. “She does enjoy a reputation of being tough minded, some think much more so than Ben Bernanke, who was ultra-collegial.”
The transition from Bernanke to Yellen should extend the life of QE for a while longer and pull it back from the cliff most saw it approaching before the about face that came out of the September FOMC meeting. “The easy money policy will get a newer leash on life and considering the current fiscal fiasco in terms of debt ceiling debacle and government shutdowns, that may not be a bad thing altogether, ” offers Dr. Shabbir. “However, the economy will be healthier if a credible weaning can be achieved before too long (12 – 18 months). ”
Such an occurrence would be a boost to economies overseas, adds Dr. Shabbir. “A gradual and a successful tapering and eventual upward adjustment of key rates such as discount rate, prime interest rates is what is needed. Uncertainty and too much too fast in too uncertain a fashion will be destabilizing for currencies of the Emerging Economies. By possibly precipitating sudden and volatile capital flight from these countries, this will be globally disruptive. IMF and other multilateral agencies already have cautioned against such a scenario which we got a little taste of this during the last several months since May 2013.”
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