Janet Yellen: Leading the Fed

At the end of January, the United States Federal Reserve Bank will undergo a transition, as the current Chairman of the Board of Governors, Ben Bernanke, will step down. On October 9th President Obama nominated Janet Yellen, the Vice Chair of the Board, as his choice to succeed Bernanke and lead the Fed.

While the choice of Yellen was hardly unexpected, it still raised many questions regarding what the United States and the world should expect to see as Yellen takes charge, especially as the Fed prepares to deal with the transition out of quantitative easing. Will Yellen be a radically different leader than Bernanke? Or are we likely to see large similarities in the Fed’s philosophy over the last ten years? While it’s impossible to answer these questions for sure until Yellen takes over, taking a look at her past and examining her prior stances can be helpful in making educated guesses.

Prior to her experiences at the Fed, Yellen attended Brown University, where she graduated summa cum laude in Economics. Immediately following her graduation, she enrolled in Yale’s Economics PhD program, eventually becoming a professor at Harvard University, where she taught Macroeconomics.

Yellen was appointed to the Fed’s Board of Governors in 1994 and served until 1997, when she stepped down to become the head of President Clinton’s Council of Economic Advisors. Eventually, Yellen became the President and CEO of the San Francisco branch of the Fed in 2004. She served in that position until 2010, when President Obama nominated her to succeed Donald Kohn as Vice-Chair of the Board of Governors.

The general consensus seems to be that the Fed’s policies under Yellen will likely be similar to a third Bernanke term. Yellen was deeply involved in coordinating and creating the current Fed policy with Bernanke, and there is little reason to believe that she would suddenly drastically change course.

One concern regarding Yellen that has caused some commotion is that she is considered to be very “dovish”, meaning that she is more concerned about maintaining full employment rather than about controlling inflation rates. A recent poll conducted by the Wall Street Journal of forty-two economists show that almost forty percent of them are not confident in Yellen’s ability to head off inflation above two and a half percent. The poll also asked respondents whether they thought Yellen was likely to be more hawkish or dovish than Bernanke, and again, nearly forty percent stated that they felt that Yellen’s policies would likely be more dovish.

Professor Marjorie Rose, who teaches macroeconomics at Dartmouth College, stated in an interview that she generally feels that Yellen was a strong choice to succeed Bernanke. “It would have been great to have a third Bernanke term; he is absolutely brilliant,” Professor Rose said. “But barring that possibility, I think Yellen was the solid choice from the field. She has had considerable policy experience, serving as Chairman of the Council of Economic Advisors under Clinton and then as President of the San Francisco Fed and now Fed Vice Chair. She has a keen intellect and understands policy and the economy.”

Professor Rose also noted that Yellen was going to be facing a unique challenge in taking over the Fed as it undergoes the transition out of quantitative easing.

“Even the mention of the possible tapering of QE a couple of months ago resulted in a spike in interest rates,” Professor Rose said, predicting the situation Yellen will be facing. “The Fed is in uncharted waters here.”

Despite the challenging situation, Professor Rose indicated that she believes that Yellen would be capable of handling both the policy and the politics of the position, stating, “The Fed chairman has to be thoughtful and very careful with any public statements; one misspoken phrase can send markets around the world into a tailspin, and I think Yellen has the experience and has demonstrated she knows how to handle herself.”