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Last week, President Barack Obama formally nominated the vice-chairman of the Federal Reserve, Janet Yellen, to succeed Ben Bernanke as Federal Reserve chairman in January. Yellen has been at the Federal Reserve for nearly twenty years and she became President Obama’s top choice for the job after his top candidate, Larry Summers, withdrew from consideration last month. If Yellen is confirmed by the Senate, which seems like a formality, she would become the first woman to lead the Federal Reserve in its one hundred year history. Holding this job would arguably make her the most powerful woman in the world and she will face several challenges, including how to handle the Fed’s quantitative easing (QE) program, how to lower unemployment while keeping inflation low, and convince central bankers in other countries that the Fed’s policies are in their best interest.
This brief will discuss Yellen’s background, the politics of her nomination, and how she might shift the operations of the Federal Reserve after taking the reins.
Readers are also encouraged to use the links below and in the related R&D to bolster their files about this topic.
Who is Janet Yellen?
Janet Yellen is sixty-seven years old and she holds a doctorate degree in economics from Yale University. As the Huffington Post writes on October 11th, she is five feet tall, was editor-in-chief of her high school newspaper, valedictorian of her high school graduating class, and she is married to George Akerlof, who shared the 2001 Nobel Prize in economics with Joseph Stiglitz. They met in the Federal Reserve’s cafeteria. Yellen’s big hobby is stamp collecting and she has a $50,000 collection.
After receiving her doctorate in economics from Yale, Yellen taught at Harvard between 1971-1976 and began her career at the Federal Reserve as an economist in 1977. Yellen was appointed as a member of the Federal Reserve’s Board of Governors between 1994-1997 and she was a member of President Bill Clinton’s Council of Economic Advisors from 1997-1999. Between 2004-2010 Yellen was president of the Federal Reserve Bank of San Francisco and in 2010 she became the vice-chairman of the Federal Reserve, which is the number two position behind the Federal Reserve chairman. Bloomberg on October 10th writes that her job as vice-chairman has allowed her to travel and talk to central bankers in London, Paris, Zurich, Basel, Bern, Helsinki, Mexico City, Tokyo, and Shanghai, which gives her solid international credentials to lead the Federal Reserve.
Yellen’s experience at the Federal Reserve is considered a great asset by those that follow the operations of the organization. Due to the fact that Yellen’s professional expertise is in academia and the Fed’s bureaucracy, she is not tainted by Wall Street connections or biases. Time on September 16th notes that this may lead to Yellen to support more significant regulation of Wall Street and banks to shore up the American financial system. Also, Yellen has a good track record in making predictions. That same Time article mentions that the Wall Street Journal earlier this year evaluated more than 700 predictions made between 2009-2012 in speeches and congressional testimony made by fourteen Federal Reserve policymakers and of them, Yellen was most accurate. The Atlantic explains on October 10th that at a June 2007 meeting of the Federal Reserve she warned that the housing sector was failing and was a “600-pound gorilla in the room.” This contradicted testimony made by Bernanke to Congress, where he said that the subprime market would only have a limited impact on the housing market. However, critics argue that Yellen’s remarks do not indicate that she anticipated the economic collapse and indeed, Yellen told the Financial Crisis Inquiry Commission in 2010 that she did not foresee the damaging impact that economic securities would have on the broader economy.
Yellen is also credited with helping Bernanke engineer the quantitative easing (QE) policies, whereby the Federal Reserve has bought $85 billion in bonds with newly printed money in order to reduce long-term interest rates, which have the biggest impact on economic markets. Some argue that Yellen is the one that engineered with the policy, while others argue that both Bernanke and Yellen collaborated. Due to the lack of notes on the Fed’s meetings regarding this policy, we will probably never know the answer, but supporters of Yellen argue that this shows she is willing to think outside of the box to resolve economic problems and is one of the reasons that she should be the next chairman (or chairwoman if you prefer) of the Federal Reserve.
The Politics of Yellen’s Nomination
It is a widely known fact that President Obama did not want to nominate Yellen to replace Bernanke. This is not because of person animosity, but President Obama has a track record of appointing people that he has close relationships with to federal posts. President Obama’s initial pick, although he never formally announced this, was Larry Summers, who was the director of President Obama’s National Economic Council between 2009-2010. Summers also served as President Clinton’s Treasury Secretary from 1999-2001. Foreign Policy on October 9th explains that Summers nomination was not warmly received by financial markets because he was seen as unpredictable and unbeholden to economic orthodoxies. Summers lack of technocratic knowledge of financial markets was seen as a liability instead of an asset, especially at a time when monetary policy is seen as the only well-functioning part of the American financial system (see the debt ceiling fight as an example of fiscal policy dysfunction). Summers nomination was popular with the Clinton-wing of the Democratic Party, which is more Wall Street-friendly on fiscal issues, but was not popular with the far-left, who saw him as too close to financial institutions. In fact, Summers supported deregulation at the end of the 1990s, which critics allege contributed to the financial crisis of 2008. There were also questions about Summers attitude toward women, although he had several female supporters that wanted him nominated. In an opinion-editorial piece in Al-Jazeera on October 11th, former bank regulator William Black notes that all six of President Obama’s wanted Summers nominated. However, Democratic senators made it clear to the Obama administration that they would not vote to confirm Summers. The Time article previously cited mentions that Summers decision to withdraw from consideration for the position happened shortly after Senator Jon Tester (D-MT), who is on the Senate Banking Committee, said he would not support Summers. This came after two other Democrats, Senator Jeff Merkley (D-OR) and Sherrod Brown (D-OH) said they would be opposed to Summers nominated. Facing a brutal and embarrassing confirmation battle that could damage his presidency, it seemed untenable to President Obama to nominate Summers and to help President Obama save face, Summers wrote the President last month and withdrew from consideration. This made Yellen’s nomination a formality.
Yellen’s nomination has been applauded by the far-left, Democratic senators, those who favor more regulation of Wall Street, and women’s groups. The Washington Post on October 9th discusses that women have been underrepresented in economics for generations and corporate boardrooms are still largely staffed by men. Critics of President Obama on the left-wing argue that he wanted to nominate Summers to cater to the desires of a male dominated Wall Street establishment by putting a man in charge. The Post goes on to note that while 35% of economic doctoral candidates are women, fewer women are represented at the higher rungs of the academic world and that fewer than 15% of tenured economic professors are women. The argument by women’s groups is that Yellen’s nomination as Fed chair will provide a positive role model for young women and get them to participate in economics.
Politico on October 8th explains that Yellen should be confirmed by the Senate, but that she will not receive a sizeable number of votes from the Republican Party. During Yellen’s confirmation as vice-chairman in 2010 she faced some Republican opposition because of her allegedly “doveish” economic views. A “hawk” in monetary circles is an economist that is concerned more with keeping inflation in check than unemployment. A “dove” is someone that is concerned with the opposite and values keeping the unemployment rate low instead of inflation. The Federal Reserve has had a “dual mandate” since the late 1970s, which calls for the Fed to ensure inflation is kept below 2% and full employment (a rate of unemployment between 5-6%) is constant in the economy. This is a difficult goal because it is not an exact science how interest rates should be set to make both of these goals possible. Extempers should know a basic overview of monetary policy before they approach questions about the Fed, but the guiding principle that they should know is that low interest rates channel more money into the economy, which allows businesses to invest and hire and reduce unemployment. However, low interest rates can produce high inflation rates by putting too much money into the economy. High interest rates take money out of the economy because it becomes more expensive for individuals and companies to take out loans, so this tends to reduce economic activity and can create high unemployment. However, by taking money out of the economy, high interest rates also guard against inflation. Yellen’s opponents allege that she will allow inflation to get out of control for the sake of reducing America’s unemployment rate, which she wants to see dive below 6.5%.
Republican critics were not happy with Yellen’s stance to favor unemployment over inflation and some voted against her nomination for vice-chairman and will probably do so again. For example, Politico notes that Senator Bob Corker (R-TN) on the Senate Banking Committee has signaled that he will approach Yellen’s nomination with an open mind, but since he does not see that her monetary views have changed he will likely vote against her. During her vice-chairman confirmation, Senator Richard Shelby (R-AL) also questioned why Yellen did not control lending standards better while she was in charge of the Federal Reserve Bank of San Francisco. Tea Party Republicans also think that the Federal Reserve is interfering with fiscal policy through QE and they worry that inflation will eventually take off as a result of the policies. As Foreign Policy explains on October 9th, what divides the Tea Party and the political establishment is that the Tea Party wants to get America’s economic pain over with immediately and crash the economy so that the fiscal healing can begin, while the establishment thinks a combination of loose monetary and fiscal policies can bring the economy back to health. This is one of the underlying debates behind the recent debt ceiling and government shutdown battle. The Economist on October 12th estimates that Yellen will probably receive fewer than the seventy votes that Bernanke received when he was nominated for a second term in 2010. At the time Bernanke received the lowest total of votes for a Federal Reserve chairman during confirmation, but Yellen’s nomination seems poised to break that mark. It is unlikely that Republicans will filibuster Yellen’s nomination because that would provide fodder for the Democrats “war on women” charge, but the highly partisan nature of her confirmation may suggest changing political attitudes toward the Fed. Foreign Affairs presents an excellent write-up of this situation on September 22nd when they discuss that since the tenure of Paul Volcker as Federal Reserve chairman between 1979-1987, central banks have acquired more authority as skepticism about the strength of fiscal policy and partisan bickering have risen and elevated the Fed’s non-political role. Like the Supreme Court, which is also non-partisan, the Fed has become a place that is elevated in the minds of Americans as an institution to resolve disputes from a dysfunctional political system. Foreign Affairs laments that this “atrophying” of legislative power is troubling and the result of the political class not resolving problems is that the selection of the Fed chairman is becoming as bitter as the Supreme Court because this is where the real power is starting to reside within American society.
Yellen as Fed Chair: What Will She Do?
Assuming that Yellen is confirmed by the Senate and succeeds Bernanke at the Fed in January, she will confront some significant challenges. First, she must decide what to do with the QE program. Although the Fed sent signals earlier in the year that they would start rolling back the QE program by the fall, the Fed recently decided to keep it going, which financial markets appreciated. However, the Fed is starting to face pressure from central bankers over its communications regarding QE. The Wall Street Journal on October 11th explains that the International Monetary Fund (IMF) and World Bank are having conversations about the impact of the Federal Reserve’s QE program on the global economy. Central bankers in Canada, China, England, and the developing world want more clarity about how long the QE policy will continue because when the Fed starts to reduce its bond buying it will lead to the interest rate on U.S. Treasury securities increasing and making them more attractive to bond investors. This, in turn, could pull money out of the developing world’s markets and Bloomberg explained on October 10th that when Bernanke announced in May that the Fed could start reducing bond purchases in the next few meetings, emerging stock markets lost more than $1 trillion in value, creating a foreign relations nightmare for the United States. The withdrawal of QE from the market is called “tapering” and it is expected that Yellen will favor a slower taper of QE than Summers would have had when he received the position. The Christian Science Monitor on October 9th explains that Yellen is said to favor the continuation of QE until unemployment falls to 6.5%, but this carries risks of continuing QE too long and distorting economic markets by keeping interest rates too low, putting too much money into the economy (which would produce inflation), and making investors put money into riskier assets that carry higher interest rates. Thus far QE has not produced massive inflation, but that is not to say that it may not happen. When to stop QE will also be a challenge because if the Federal Reserve stops it too soon, interest rates would rise and possibly choke economic growth and plunge the economy into a recession. Therefore, Yellen will face a significant balancing act when it comes to handling the Fed’s QE program. To get a pro/con evaluation of the QE program, extempers should click on this link.
Another challenge that Yellen will face is how she wants to lead the Federal Reserve. Bernanke favored more open discussion in meetings and allowed Federal Reserve governors to voice dissenting views. Yellen likes the idea of open debate, but as the New York Times writes on October 9th, she thinks the idea of allowing Fed officials to voice their views freely has created confusion and uncertainty in financial markets. Also, whereas Bernanke was more averse to conflict, Yellen is more assertive. This could lead over time to her exerting more of a domineering influence over the Federal Reserve, which could eventually stifle debate on issues that she is passionate about.
A third sizeable challenge that Yellen is will face, and arguably the most significant aside from QE, is the re-regulation of the banking system and Wall Street. The Atlantic on October 10th says that she may be more aggressive in this area that her past predecessors at the job, Alan Greenspan and Bernanke, have been and she may be more aggressive than President Obama. The article notes that Yellen favors higher capital standards for banks that are deemed too-big-to-fail and providing more oversight into how those banks can acquire funding beyond deposits. She also appears willing to provide more oversight over securities and financial vehicles that contributed to the 2008 financial crisis. William Black’s editorial in Al-Jazeera that was cited earlier argues that there are several steps that Yellen should take to provide greater regulatory oversight: appoint a new head of supervision in the Fed that is a good regulator, propose to Congress that the existing system where bank examiners and supervisors are employees of regional Federal Reserve banks end because it promotes conflicts of interest, support legislation that will eliminate banks deemed “too-big-to-fail,” restore Glass-Steagall, which separated commercial and investment banks, and the repeal of the Commodities Futures Modernization Act of 2000 that did not allow derivatives to be regulated. Nevertheless, Yellen’s reputation as a regulator might be overstated in the sense that during her time in San Francisco she did not crack down on lax lending standards and, as the New York Times explains on October 9th, she supported the growth of big financial institutions like Citigroup in the 1990s.
However, although Yellen will become the first Democratic Federal Reserve chair to be appointed by a Democratic president in more than thirty years, it is not expected that she will be significantly different from Bernanke, at least in the short-term. In a Wall Street Journal poll of forty-two private sector economics on October 9th, 60% said that her policies will be no different from Bernanke. 38% of those surveyed on that question said that she would be too doveish with monetary policy, which could create problems if inflation gets out of control. A plurality of those economists surveyed were confident in her leadership, with 35% (15 economists) thinking she would be a good Fed chair, but 30% were not very confident (13), 26% were somewhat confident (11), and 9% were not at all confident (4). Therefore, one of the major factors that extempers need to pay attention to in the early years of Yellen’s tenure if how she reacts to economic circumstances if inflation begins to rise and unemployment remains high. The big question that the world is waiting on is whether she will continue to support low interest rate policies and let inflation take off, or whether she will raise the interest rate to keep inflation down.
Overall, it appears that Yellen’s tenure at the Fed will be a continuation of the Bernanke regime in supporting QE and low interest rates. Her tenure will also be historically significant because she will be the first woman to lead the Federal Reserve. However, the break may come from her predecessors in the respect of paying more attention to the “human” side of the economy. Yellen’s concern with unemployment and the poor housing market may make the Fed’s policies more “socially responsible” and greater regulation of Wall Street could curb some of the excesses that contributed to the financial crisis of 2008. All will be for naught, though, if Yellen cannot help guide the U.S. economy back to a more sustained recovery, if she cannot coordinate the Fed’s actions better with the international community and Congress, and if she fails to tame inflationary pressures in the near future.