Hurricane Yellen


Kevin Schoelzel

There are storm clouds on the horizon for Janet Yellen, Barack Obama’s pick to replace Ben Bernanke as the Chair of the Federal Reserve, and these clouds are not Rand Paul’s latest promise to block her confirmation in his ongoing libertarian fundraiser masquerading as a crusade against the Federal Reserve. Instead, her trouble lies further ahead in the future due to the unfortunate consequence of bad timing.

First, a little background on Yellen and how she found herself in the path of the storm. Yellen is from Brooklyn, New York and studied economics at Brown before receiving a doctorate from Yale in 1971. She went on to an academic career at Harvard and the University of California’s Haas Business School. In 1980, she began her work for the Federal Reserve as an economist for the Board of Governors. Eventually, Yellen served as the Chair of Bill Clinton’s Economic Advisors from 1997 to 1999, before returning to a stint in academia and other policy positions. From 2004 to 2010, she was the President and Chief Executive Officer of the Federal Reserve Bank in San Francisco along with being a voting member in the Federal Open Market Committee.  In 2010, she began her four year term as Vice-Chair of the Federal Reserve.

In short, Yellen’s resume is an impressive ascent through the upper ranks of academia and government positions. While her lack of private market experience worries some of her critics, she remains one of the most respected members of the Federal Reserve. Indeed, she has done a good job during her tenure at the Fed.  In July of 2013, the Wall Street Journal conducted a comprehensive investigation of the Federal Reserve Governor’s predictions about the market. Their study, which evaluated over 700 estimations made by the members of the central bank, found Yellen to have the most accurate and reliable predictions.  Over the course of her career, Yellen established a reputation as a “dove” in that her policies tend to be more concerned with maintenance of low interest rates than with inflation. This disposition used to be political liability in Washington for someone seeking the top job at the Fed, but in recent years the dove school has received a warmer reception as inflation seems static and unemployment climbs. With this change in attitude, many of the obstacles to Yellen’s ascendency to the top position at the Federal Reserve seemed to be cleared.

However, it was not easy to reach this point in the nomination process. After Ben Bernanke announced he would not be seeking re-election as the Chairman, a field of suitors emerged interested in the job. Ultimately, it came down to two heavyweights, Yellen and Larry Summers.  Larry Summers was widely viewed as the Obama administration’s first choice. Like Yellen, he has an impressive resume, including a stint in the Clinton White House as well as President of Harvard University. However, Summers’s candidacy was politically difficult: from Republicans there was distaste for his links to the Clinton administration and from liberal Democrats there was discontentment over his role in deregulating the financial industry. In the end, Summers withdraw his name from consideration, leaving Yellen alone.

Regardless of how one feels about Yellen’s politics or her “dovish” philosophy, she is unequivocally competent and qualified. Unfortunately, Yellen finds herself at the mercy of bad timing. As William McChesney Martin, the Chairman of the Federal Reserve from 1951-1970, once famously quipped the role of the Federal Reserve was to take away the punch bowl just as the party got started.” The monetary policies enacted by the Federal Reserve since the financial crisis have been aimed at aiding the economy recovery by increasing the money supply and keeping rates low. This quantitative easing creates an environment where cheap money should stimulate growth, and the evidence over the last few years has indicated the policy has helped keep an anemic economy from becoming a stagnant one.

However, quantitative easing is going to have to end. Perhaps, for this reason, Ben Bernanke is stepping down. Having safely steered the United States economy away from the abyss, Bernanke may now figure it is best to protect his legacy and leave some other chairman to be caught swimming naked when the tide goes out. Yet, as Alan Greenspan’s recent forays into the news media has illustrated, the life of a Reserve Chair, past or present, is often riddled with recriminations and criticism. Nonetheless, these slights are more palpable from the sidelines than in the pocket.

Bernanke’s successor will have to end quantitative, and it looks like Yellen will be the one taking away the punch. This decision will not be greeted kindly. Politically, detractors will say the policy change is driven by some external agenda. Economically, should Yellen curtail the policy “too soon” the markets will view this move as destabilizing on an already shaky foundation. Should she wait “too long,” the policy change may not outpace inflation and this decision will lead to a new set of economic woes. This last scenario would be particularly damaging to Yellen, as her track record as a dove makes inflation the biggest challenge to her legitimacy.

Yellen may go on to have a long and prosperous career as head of the Federal Reserve. But at some point, she will be faced with the difficult challenge of tapering off quantitative easing. There is no saying when it will happen during her tenure, but when it does, it may well define and stigmatize her for the rest of her career. Although Yellen has beat Summers and will outlast Rand Paul’s staring match, she will likely get caught in the storm.

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