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Why I’m glad Yellen was tapped to run the Fed

Posted By Claes Bell On 10/09/2013 @ 2:31 pm In Government | 4 Comments

With their PhDs and economic jargon and mysterious market-moving meetings in Washington, D.C., the Federal Reserve may seem pretty far removed from the day-to-day finances of the average person.

But there are few humans on the planet who have more power over the economy we all live and work in than the chairman of the Federal Reserve. Their decisions affect the rates we get on financial products almost all of us use — mortgages, credit cards and investments — and the health of the labor market where most of us earn the majority of the income we depend on.

With so much at stake, I’m glad Janet Yellen got the nod to be the next chairman. I’m sure she’ll make her share of mistakes just like any chairman, but here’s why I think she’s better than some of the other candidates that were floated, including economist Larry Summers:

  • Practical experience. Lots of economists probably have ideas about how they would run the Fed, but central banking is a specialized trade, requiring practitioners to consider the consequences of their actions on everyone from huge banks to small businesses to everyday Americans. Few have more practical experience in that than Yellen, who has been part of the rate-setting Federal Open Market Committee since 2009, and before that, from 1994 to 1997. Yellen also served as president and CEO of the Federal Reserve Bank of San Francisco from 2004 to 2010.
  • Understanding of the economy. Like current Fed chairman Ben Bernanke and most other regulators, Yellen was blindsided by the housing crisis and the Great Recession, but she’s better than most at the Fed when it comes to forecasting where the economy is headed. In a recent study [3] by The Wall Street Journal, she ranked number one among 14 Fed policymakers based on the accuracy of her predictions made in speeches and Congressional testimony.
  • Focus on reducing unemployment. High unemployment continues to dog the U.S. economy, and addressing it will be a big project for the incoming chairman. The job market was a major theme [4] of Yellen’s academic work, and she’s continued to focus on that in her work at the central bank. She was a proponent [5] of the Fed’s current policy of tying the end of quantitative easing to specific unemployment milestones.
  • Regulating banks. The next Fed chairman is going to be handling a lot of the rule-making still yet to be done under the Dodd-Frank financial reform law, and will have a hand in whether we face another financial crisis in the years to come. Yellen seems to grasp the threat [6] too-big-to-fail banks pose to the economy as well as anyone at the Fed.
  • Temperament. In my opinion, the better a Fed chairman is doing, the less you hear about them — you don’t want a “peacock” out there. Fed chairmen, more than almost anyone else in the world, have every public statement scrutinized for meaning by global markets; they can literally move markets with a word. Yellen is skilled in the ways of “Fed speak” — the speeches of hers that I’ve read and seen are carefully parsed so as not to tip the Fed’s hand too much. The other candidate floated, Summers, has a history of his mouth getting him in trouble — not good for a Fed chairman.

Also, I have to admit that as the father of two lovely daughters, I’m pretty excited to see the first ever female nominee for Fed chair.

Still, even with these qualifications, getting Yellen through the confirmation process won’t be easy. And there’s no way of knowing if, when the time comes, Yellen will be able to manage what’s going to be a huge drawdown of monetary stimulus out of the economy. The Fed’s balance sheet is currently at $3.75 trillion and rising, and at some point it’s going to be time for the Fed to slow down and reverse all the money it’s been pumping into the economy by buying up mortgage-backed securities and Treasuries.

While controlling inflation isn’t a big concern right now, that could change rather suddenly, and Yellen will have to be on top of it.

What do you think? Is Yellen a good choice? If not, who would you have liked to see instead?

Photo credit: Reuters/Robert Galbraith


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[3] a recent study: http://graphics.wsj.com/fed-predictions/

[4] a major theme: http://www.ppge.ufrgs.br/giacomo/arquivos/eco02037/yellen-1984.pdf

[5] was a proponent: http://www.federalreserve.gov/newsevents/speech/yellen20111021a.htm

[6] grasp the threat: http://www.federalreserve.gov/newsevents/speech/yellen20130602a.htm

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