After Bernanke, A Bird of a Different Feather

Janet Yellen could become the Federal Reserve’s first female chairman. She’d certainly be its most transparent.

By Peter Coy


Eating in the employee cafeteria was considered outré for Federal Reserve governors when Janet Yellen joined the board in 1994 — so much so that a writer for the Minneapolis Fed’s quarterly magazine, The Region, called her on it in an interview. “It is a bit uncommon, because the Board is a somewhat hierarchical place,” Yellen confessed. “I can’t frankly tell you why that is. But that’s not the way I operate. Eating in the cafeteria with the staff is a pretty good way to learn what people are thinking about, what’s on their mind. And I enjoy the interaction.”

The Fed is a far more open place today, and Yellen, now the Fed’s vice chairman, deserves a share of the credit. Governors are now as commonplace as ketchup bottles in the cafeteria. More important, monetary policy is transparent. In January 2012, on the recommendation of a communications committee Yellen headed, the Fed for the first time announced its targets for inflation (2 percent) and the unemployment rate (5.2 percent to 6 percent). “I hope and trust that the days of ‘never explain, never excuse’ are gone for good,” she told the Society of American Business Editors and Writers this April.

The communications strategy that Yellen, 66, pioneered has become one of the main implements in the Fed’s box of tools. It’s one of the reasons she’s now considered the most likely person to succeed Ben Bernanke as chairman when his second term expires at the end of January. If so, her thatch of white hair and rosy cheeks will soon be as familiar to the public as Bernanke’s trimmed beard or Alan Greenspan’s owlish glasses.

Having helped rescue the U.S. from the deepest downturn since the Great Depression, in the years ahead the Fed must decide when and how quickly to wean the economy off the world’s biggest bowl of spiked punch. Act too slowly to restore normality to monetary policy, and the risk is hard-to-extinguish inflation and destabilizing asset bubbles. Act too quickly, and the economy could lose momentum and get stuck in a rut, as Japan’s was from 1990 until (maybe) this year.

That’s why communication matters. The Fed’s job will be manageable if it maintains credibility with business executives and the bond market — and nearly impossible if it doesn’t. The Federal Open Market Committee has already pushed the federal funds rate as low as it can go and embarked on a bond-buying spree. The main tactic left is influencing market expectations. With Yellen’s input, the Fed has turned increasingly to “forward guidance,” in its lingo, to persuade traders, chief executives, and ordinary Americans that they should invest and spend because monetary policy will be loose until the recovery has fully taken hold. The Fed’s also promising that inflation will be higher in the future than it is today, another argument for people to spend now.

The Fed, traditional guardian of sound money, is in the unaccustomed position of vowing to keep money easy despite growing pressure from bond-market vigilantes and politicians. The pressure to curtail bond purchases and snug up short-term interest rates will only intensify as the economy strengthens. Kansas City Fed President Esther George is already saying that Fed policy is “overly accommodative, causing distortions and posing risks.” Yellen herself is in the cross hairs. Bob Janjuah, global head of tactical asset allocation for Japan’s Nomura, told CNBC in April, “A client said to me a few weeks ago that if Karl Marx was in charge of the world, he’d have Janet Yellen as his central bank governor.”

If she gets the top job — surveys of Fed watchers put her ahead of the likes of ex-Treasury Secretary Timothy Geithner or a reappointed Bernanke — Yellen will have to convey the nuanced message that she has the head of a hawk and the soul of a dove: The hawk worries about inflation and stands for sound money; the dove wants maximum employment. The Fed’s dual mandate demands that it pursue both goals, but each Fed voter weighs the priorities differently.

“Dove” is the label most often applied to Yellen. Unemployment was the focus of her academic research in a career that took her from a Yale Ph.D. to teaching at Harvard, the London School of Economics, and the University of California at Berkeley’s Haas School of Business. “These are not just statistics to me,” she said in February at a conference co-sponsored by the AFL-CIO. “The toll is simply terrible on the mental and physical health of [jobless] workers, on their marriages, and on their children.” But Yellen can be a hawk, too. Laurence Meyer, who served with her on the Fed’s Board of Governors, says that in 1996 he and Yellen went to Greenspan’s office to ask for higher interest rates because they were concerned the economy was overheating. There was “an awkward silence,” Meyer recalled in a 2010 blog entry. “Needless to say, we didn’t win this argument.”

Yellen, who did not provide an interview for this story, is a dove today because circumstances demand it. Unemployment is at 7.5 percent, and inflation is below the Fed’s 2 percent target. “If we had 4 percent unemployment and 4 percent inflation, she would not be arguing for easier money,” says Princeton University economist Alan Blinder, himself a former Fed vice chairman.

Trained by one Nobel laureate, Yale’s James Tobin, Yellen is married to another, George Akerlof of Berkeley. She served as President Clinton’s chief economic adviser and has been in the Federal Reserve system off and on since 1994. On monetary policy, there’s little daylight between her and the current Fed chairman. Both favor rules and targets and mistrust hunches. On style, Yellen is Brooklyn-born to Bernanke’s small-town South Carolina.

“She is very easy to get along with. Laughs easily,” says Blinder, who wrote a book with her called The Fabulous Decade. “She can argue without seeming too argumentative and getting the other side’s back up, which is a nice talent that not everybody has.” Adds Yale economist Robert Shiller: “She has a personal dignity and a sort of gentle firmness.”

A more accurate description of Yellen than dove is “activist” — someone who isn’t afraid to wield the Fed’s enormous power to affect the real world. Tobin taught her that. “He encouraged his students to do work that was about something,” Yellen told the Yale Daily News after Tobin died in 2002. “Work that would not only meet a high intellectual standard, but would improve the well-being of mankind.”

Activism can have its dangers, of course. Poorly calibrated, it can make a bad problem worse. Too-low rates after the 2001 recession helped inflate the housing bubble in 2007. Goldman Sachs calculated on May 29 that rates wouldn’t rise until late 2015 or 2016 under Yellen’s preferred approach. Some who prefer a less aggressive approach, such as Austrian School economist Peter Schiff, have more faith than Yellen in the economy’s self-healing powers. People like BlackRock’s Peter Fisher are concerned that the Fed’s rate ceiling discourages savings and depresses needed investment. Still others, such as Dallas Fed President Richard Fisher, worry more than Yellen does that low rates, even if they goose growth in the short run, will damage the economy in the long run by inflating bubbles that will inevitably pop.

The Bernanke/Yellen orthodoxy is that the Fed can use regulation to keep ultraeasy money from leading to sloppy lending or speculation. One way to rein in excesses is to order specific banks to cut back on risky lending. But imagine the resistance the Fed would encounter if it tried to prevent certain banks from making what appeared to be profitable loans. In a February speech, Fed Governor Jeremy Stein questioned how effective such regulation can be. He said tighter monetary policy “gets in all of the cracks” that regulation misses.

If Yellen does succeed Bernanke, her biggest challenge is likely to be conveying contradictory messages to very different constituencies. To businesses that are wary of investing because their consumers are out of work, “Don’t worry about unemployment.” To the bond market, “Don’t worry about inflation.” Because of the perception that she’s a dove, it’s the bond-market vigilantes who’ll need the most persuading. “I’m a little bit concerned that the markets will want to test her,” says Robert Brusca, chief economist of FAO Economics in New York. If Yellen fails, the U.S. economy could suffer the worst of both worlds: high inflation and high unemployment. If she succeeds it will be a victory not just for her, but for transparency.


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