Well, that was expected. Janet Yellen will be nominated by the President tomorrow AM as the next chairperson of the Federal Reserve. It’s not over ‘til it’s over, and it hasn’t started yet, but I suspect she’ll be approved by the Senate. (After the Summers mess, you can bet the admin took the temperatures over there before going public with this.)
It’s good news, but it’s late and I’m tired so just a few thoughts:
–There’s been tons of ink spilled on this since the announcement earlier, and the FT has a very useful collection of links.
–I’ve written many pieces in praise of the Fed’s work to help close our economy’s persistent output gaps and lower the unemployment rate. Their interest rate and less conventional policies (QE, the “twist,” forward guidance) have helped, though with fiscal policy pushing the other way, their aggressive measures have had less traction than I’m sure they’d have liked. But Yellen has been a very solid supporter and originator of the recent vintage macro-management. In this sense, she’s a continuity candidate.
–I’ve found her analysis of the problems in the recent and current economy uniquely clear and persuasive. For example, you’d be very hard pressed to find a better analysis of the macro challenges we face, including self-inflicted wounds, than this Yellen speech from earlier this year.
–As that speech shows, one very important thing she’s brought to the table is the absence of rose-colored glasses. Most macroeconomists have consistently proclaimed the economy on the mend too soon—they saw “green shoots” where there were none. Particularly if you look at Yellen’s “optimal control” analysis—running simulations of different economic paths to determine the one that most effectively reduces unemployment without generating too much inflation—you’ll see her going beyond the analytics of established, though not always reliable, “rules” regarding how the Fed should set rates. I have faith that should she become chairwomen, Yellen will be less likely than most to let up on monetary stimulus too soon.
–The Fed’s regulatory role is essential if we ever hope to get out of the econo-shampoo-cycle: bubble, bust, repeat. Here, Yellen’s record is mixed, as I suspect will come out at her confirmation hearing. She appears to have seen bubbles and irregularities before others—the more you learn about her, the more you appreciate her analytic rigor—but not to have done much about them. To her credit, however, she has admitted as much, and I believe she’s learned from her mistakes. These admissions have led some banks to worry about her as a regulator—which is, of course, a good sign.
–Opponents will try to paint her as an inflation dove but there’s just nothing there. Remember, she’s been with the Fed for years with a long paper trail and she can and will point to many examples of hawkishness in the face of perceived price pressures. In the latter 1990s, when unemployment was falling to levels thought to be inflationary, she tried to get Greenspan to raise rates (to his credit, he did not do so; unemployment fell further and prices decelerated). She also pushed the Fed to adopt an informal 2% inflation target, a goal that has become more explicit over time. So why do folks think she’s such an inflation dove? Because they don’t know her long record; they’ve just tuned in to her recently.
But it’s like I’ve stressed above: she’s rigorously empirical as opposed to doctrinaire about it, which is what you want in your Fed chair.