It’s looking increasingly likely that Ben Bernanke will no longer be the Chairman of the Federal Reserve at this time next year.
In an interview Monday, President Obama said Bernanke has “already stayed a lot longer than he wanted or he was supposed to.”
When asked about his intentions regarding plans for the future, Bernanke has not said much, though the Fed chairman has decided to skip this year’s Jackson Hole summit of world central bankers in August, where he would normally be responsible for delivering the keynote address.
In recent years, the Jackson Hole keynote has been an important stage for signaling big shifts in U.S. monetary policy, a key driver of economic dynamics not only in America, but around the world.
This year, the most important signal from the keynote may not be in the contents of the speech, but in who is delivering it in Bernanke’s place: Federal Reserve Vice Chairman Janet Yellen, who is widely tipped as the frontrunner to replace Bernanke when his term expires in January.
If Obama does select Yellen to replace Bernanke, she will become the first woman ever to chair the Federal Reserve, putting her in arguably the most powerful policy-making role in the world. And of course, unless you follow the Fed, you’ve probably never heard of her.
(Global financial markets have reinforced the notion that the Fed chair is all-powerful in recent weeks: as fears that the Fed will begin slowing the pace of its monetary stimulus have seeped into the marketplace, U.S. government debt has sold off dramatically, causing major reverberations in virtually every market around the world. Because U.S. monetary policy is so influential, economist David Beckworth, for example, has referred to the Fed as a “monetary superpower.”)
By every account, Yellen is a thoughtful and brilliant economist, which has allowed her to rise to where she is today.
“Ms. Yellen climbed the Fed ranks by being methodical rather than iconoclastic,” writes Wall Street Journal reporter Jon Hilsenrath in a recent profile of the Fed vice-chairman. “She shows up at policy meetings with carefully crafted statements. Those who work with her say she arrives at the airport hours early.”
“Ms. Yellen climbed the Fed ranks by being methodical rather than iconoclastic. She shows up at policy meetings with carefully crafted statements. Those who work with her say she arrives at the airport hours early.”
“[Yellen] is very low-key, but impresses people quickly with the depth of her understanding and the sincerity of her views,” said fellow Berkeley professor Andrew Rose in 1994, describing her as “collegial, persuasive and effective.”
She has also worked with the academic elite of the economics sphere her entire career. Her mentor at Yale, where she received her Ph.D. in 1971, was Nobel-Prize winning economist James Tobin, whose legacy is enshrined in today’s economics textbooks. After graduating from Yale, she taught at Harvard for five years. Then, she did a two-year stint (1976-1978) as a staff economist at the Federal Reserve, where she met her husband, fellow economist and future Nobel Prize winner George Akerlof.
After the Federal Reserve, Yellen was faculty at the London School of Economics for two years. Then, in 1980, she accepted a position at the University of California, Berkeley, where she stayed until her appointment to the Federal Reserve Board of Governors in 1994 by President Bill Clinton.
Months before his April 1994 nomination of Yellen, Clinton had selected one of Yellen’s long-time colleagues in the Berkeley economics department, Laura D’Andrea Tyson, to chair the Council of Economic Advisers (making Tyson his top economist at the White House).
According to an L.A. Times report Clinton’s 1994 nomination of Yellen, Tyson was “deeply involved in the selection process for filling the Fed vacancies.” The report went on to assert that “Yellen, who would succeed Republican Wayne Angell on the board, also fulfils the Administration’s desire to name a woman or a minority to offset the appointment of [Alan] Blinder, a white male, to be Fed vice chairman.”
(Tyson herself was reportedly tapped by Clinton over then-World Bank economist Larry Summers because Summers and Clinton’s vice president, Al Gore, didn’t see eye-to-eye on issues related to environmental economics.)
So began Yellen’s long career in monetary policy-making, which has already been momentous in reshaping the directives that have emanated from the central bank and driven major changes in the global economic landscape.
One of the defining moments for Yellen that crystallized both her economic views and her character traits came two years into her tenure on the FOMC.
In a recent profile of Yellen, New York Times correspondent Binyamin Appelbaum tells the story:
In July 1996, the Federal Reserve broke the metronomic routine of its closed-door policy-making meetings to hold an unusual debate. The Fed’s powerful chairman, Alan Greenspan, saw a chance for the first time in decades to drive annual inflation all the way down to zero, achieving the price stability he had long regarded as the central bank’s primary mission.
But Janet L. Yellen, then a relatively new and little-known Fed governor, talked Mr. Greenspan to a standstill that day, arguing that a little inflation was a good thing. She marshalled academic research that showed it would reduce the depth and frequency of recessions, articulating a view that has prevailed at the Fed. And as the Fed’s vice chairwoman since 2010, Ms. Yellen has played a leading role in cementing the central bank’s commitment to keep prices rising about 2 per cent each year.
Inflation has become one of the biggest stories in economics recently as annual inflation rates have been declining and seem stuck persistently below the Fed’s 2.5% threshold for tightening monetary policy. Today’s consumer price index release revealed that core price inflation remained stubbornly unchanged at 1.7% in May.
Persistently below-target inflation readings have provided support for the argument that the Fed should continue with its controversial bond-buying program aimed at providing monetary stimulus to the economy.
As arguably the most dovish member of the FOMC – meaning she tends to focus on unemployment concerns rather than keeping inflation at bay – Yellen has undoubtedly had a big role in shaping the course of current policy.
Yet Yellen’s record shows that she has not always argued for easy monetary policy and higher inflation, despite her dovish tilt.
“The risk of an increase in inflation has definitely risen, and I would characterise the economy as operating in an inflationary danger zone.” — Janet Yellen, September 1996
Later in 1996, the economy was expanding, labour markets were tight, but core inflation was on a steady downward trend.
At the September 1996 FOMC meeting, though, Yellen argued, “I conclude that the risk of an increase in inflation has definitely risen, and I would characterise the economy as operating in an inflationary danger zone.”
While Yellen ultimately supported then-Chairman Alan Greenspan’s decision to leave interest rates unchanged, she couched her decision by saying, “I find myself very close to the margin and would also have been quite willing to support an upward adjustment of 25 basis points today, had you proposed that.”
In 1996, Yellen’s argument rested on the thesis that the labour market was too tight.
To be sure, things are much different now – the unemployment rate remains stubbornly elevated around current levels at 7.6%, and concerns over inflation appear to be all but dead at this point.
And given the Fed’s current policy stance – committed to unprecedented monetary easing until signs of improvement in the labour market re-emerge – perhaps it’s just as accurate to say that Yellen has already become the most powerful woman in history.
Taking over the chairmanship in January would cement it.
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