Ready or Not: Janet Yellen and the Route to the Fed

With the government shutdown being the main news the first two weeks of last month and Obamacare stirring a considerable amount of debate since then, another topic that might impact all American (and foreign) citizens has been left in the shade: the person replacing Ben Bernanke as the next chair of the Federal Reserve. This decision is crucial, as the next leader of the Fed will decide, through her actions, whether the Fed will become a backstage actor in the U.S. economy or be at the forefront of policy innovation.
For most this could be considered a rhetorical question. For months there have been speculations on the next figure to lead the Federal Bank, but only weeks after Larry Summers announced that he would not be seeking this position any longer, the answer to this question seems clear. Current Fed Vice Chair Janet Yellen is the Presidential nominee and seeing as she recently successfully testified before the Senate Banking Committee, her confirmation is just a matter of weeks away .
Janet Yellen seems a safe choice. Yellen has a great track record. She was the chair of the Council of Economic Advisers (CEA) for three years, and spent six years as chair of the San Francisco Fed. Moreover she was among the number of economists that seem to have predicted the 2008 crisis and housing bubble. She is described by the Financial Times as a New Keynesian, whose focus remains a low inflation rate and low unemployment. Nevertheless, unlike her once competitor, Larry Summers, she is more likely to try to regulate big banks and be harsher on Wall Street than her predecessors.
There is also a symbolic nature to this nomination, though some might decide to ignore it. If elected she would be the first woman to ever lead the Fed. Of course, Yellen has the full backing of President Obama. But there are also talks that she will be able to win more than just the 60 votes she needs to be elected, thus perhaps gaining a rare bipartisan image. Plus, she would be the first Democrat in a quarter century to be nominated for such a job.
If elected to be the next Fed chair, Yellen would have big shoes to fill. Even if he has made his fair share of mistakes, Bernanke has been, for the most part, a reliable chair. His monetary policy has not been revolutionary, yet he provided the necessary boost to the economy by maintain a steady policy of quantitative easing, among other methods. Furthermore, he has refused to sacrifice the Fed’s two-percent inflation rate to lower unemployment, a policy that in hindsight might have saved the United States economy from potential rampant increase in inflation, which is what most economists fear in such instances.
The question remains whether the next chair should be merely reliable, and perhaps continue the path laid out to her or him by Bernanke, or become a revolutionary figure and revamp the usage of traditional monetary policy. Now that the U.S. economy is steadily recovering one might argue that a cautionary policy, continuing the stable influx of money in the economy through quantitative easing, would be the best policy. And yet there is always the fear that the economy itself has grown resistant to quantitative easing and the market’s expectations are no longer highly influenced by the influx of money in the economy.
Yellen could potentially become the revolutionary that changes the face of the Fed, 9 years after Alan Greenspan modernized the science of monetary policy. Nevertheless, the issue remains as to how much room she would have to implement any new ideas she might have. The Fed has a dual mandate that stretches between maximizing employment and moderating inflation.  It seems like Yellen has plans to use the tools of monetary policy and regulation to increase general American well-being through a more robust recovery in the context of price stability. What Yellen argued was that seeing as the Fed does not have the direct power to create jobs, or impelement infrastructure, it could try its best to maintain a stable economy that would create the right circumstances that would accelerate such recovery. Furthermore, she believes that the Fed has the capacity to predict future bubbles and it should use it to do so.  Janet Yellen has great plans and a vision. How she will implement such a vision remains to be seen. Janet Yellen might be the right person to continue the work of the Federal Reserve, but whether she will be remembered as just the first chairwoman of the Fed or a revolutionary Fed chair may lie beyond her power.
Photo Credit: Bloomberg