People are feeling awfully confident these days that a) Federal Reserve Chairman Ben Bernanke will step down when his term expires in January, and that b) President Obama will nominate Fed Vice Chairwoman Janet Yellen to replace him.
Here are a few things you should know about Yellen:
She has a long history with the Fed. Yellen has been the Fed’s vice chairwoman since 2010. Before that, she was president of the San Francisco Federal Reserve. Before that, she headed the Council of Economic Advisers (not a Fed post) and before that she was a member of the Fed’s Board of Governors under Chairman Alan Greenspan. Her first policy-setting Federal Open Market Committee meeting was on Aug. 16, 1994 (her first Board of Governors meeting occurred the day before). She also worked as a Fed economist in the 1970s and met her husband, who was then also working at the Fed, at the board. She probably doesn’t get lost much in the halls of the building.
She's a Democrat, and a dove. Yellen was appointed to the Board of Governors by President Clinton. She's also one of the most dovish members of the Fed's policy-setting committee, supporting continuation of the Fed's unconventional strategy of buying large amounts of bonds to get the economy growing as others, namely Kansas City Fed President Esther George, call for an end to the purchases.
"There is the high cost that unemployed workers and their families are paying in this disappointingly slow recovery," Yellen said in a March speech. "There is the risk of longer-term damage to the labor market and the economy's productive capacity. At present, I view the balance of risks as still calling for a highly accommodative monetary policy to support a stronger recovery and more-rapid growth in employment."
In the world of monetary policy, doves are more likely to advocate keeping policy loose — or interest rates low — longer than hawks, who worry that prolonged periods of easy money risk running up inflation. During Yellen's Board of Governors confirmation proceedings in 1994, Republican Sen. Lauch Faircloth raised concerns about her expected dovishness. “I do not believe that Janet Yellen understands what will happen if the Federal Reserve abandons a tough anti-inflation stance in order to pursue her multiple policy goals. The Federal Reserve's anti-inflation stance is one of the few things that is keeping capital from leaving this country,” he said.
Yellen reportedly struck a balanced tone at the hearing. "I don't want the economy to slip into a recession.... By the same token, if we see signs of emerging inflation ... the Fed also has to be prepared to act," she said, according to a contemporaneous wire service report.
While Yellen is clearly one of the most dovish members on the Fed’s policy-setting Federal Open Market Committee today, Laurence Meyer, who was a Fed governor alongside Yellen in the 1990s, offered a slightly different perspective in a blog post he wrote in 2010.
Before the September 1996 FOMC meeting, Janet and I went to see the Chairman to talk about the policy decision at that meeting and at following meetings. This was the only time I ever visited the Chairman (at my initiative) to talk about monetary policy, before or after a meeting. Janet and I were both worried about inflation, even though it was very well contained at the time. We told the Chairman that we loved him but could not remain at his side much longer if he continued, as he had been doing for some time, to push the next tightening action into the next meeting, and then not follow through. He listened, more or less patiently. I recall, though this may have not been the case, that he just smiled and didn’t say a word. After an awkward silence, we said our good-byes. Needless to say, we didn’t win this argument. Yet, we never dissented. That is another matter of etiquette for the entire Board, at least since when I was there: The Board is a team, always votes as a block, and, therefore, always supports the Chairman.
Yes, Janet is a dove today. But this is so principally because she passionately believes in the dual mandate (price stability and full employment). It could be said that she simply believes in following the law of the land, in this case the Federal Reserve Act! Given the Fed’s mandate, and because she expects the unemployment rate to be very elevated for a long time and inflation to be very low for quite some time, she wants to make a “late” exit from the near-zero rate policy. How could you not be a dove under these circumstances? Certainly I would be a dove if I were on the Committee today. But Janet would quickly switch camps, unquestionably along with all her dove colleagues, if the outlook or her forecast changed such that a serious threat to price stability emerged. There simply are no doves at central banks under these circumstances, and certainly not on the FOMC.
The next Fed chairman will oversee the central bank's exit from the unconventional, easy-money policies it has adopted over the past five years. Worries abound—chief among them, that the Fed will inflate the next asset bubble by keeping policy too loose for too long. Ditto creating runaway inflation. The Fed will also face choices about how long to keep its interest rate near zero, and how to return its roughly $3 trillion portfolio to a more normal size. Yellen's dovish tendencies are likely to come up at a confirmation hearing, if she's nominated to head the central bank.
She has a diet rich in economics. Yellen is married to macroeconomist and Nobel laureate George Akerlof, with whom she has frequently collaborated in her career. She told the Minneapolis Fed’s The Region publication in 1995 that if you were to spend an evening at her house, “You would eat a diet that is richer in discussions of economics and policy issues than many people would find appetizing.” She's spent a lot of time in academia: Yellen studied economics as an undergraduate at Brown University and received a Ph.D. from Yale in 1971. She has taught economics at the University of California-Berkeley, Harvard University, and the London School of Economics.
The next Fed chief? In March, Bernanke told reporters that he's not the only one who can oversee the Fed's exit strategy, suggesting that he may not stick around in 2014. But he hasn't announced his departure yet, and there's always a chance he'll stay if President Obama asks (Bernanke did acknowledge that he had "spoken to the president a bit" about his future). And Yellen, though seen as the favorite to replace him, isn't the only name people are speculating about: former Treasury secretaries Larry Summers and Timothy Geithner and former Fed Vice Chairman Don Kohn have also graced "who could be next?" lists, including National Journal's.
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