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Yellen Faces A Tough Job At The Fed From Day 1
Originally published on Wed October 9, 2013 7:02 pm
Starting a new job is always tough. You want early success to prove you really were the right pick.
That's especially true if you happen to be the first woman to hold that job. Ever.
So when President Obama on Wednesday nominated Janet Yellen to lead the Federal Reserve, she might have had two reactions: 1) Yippee and 2) Uh-oh.
As Fed head, Yellen would have to guide interest-rate policy in a way that boosts economic growth without triggering inflation.
The pressures would be enormous. Example: Just as Yellen's appointment was being rolled out, the International Monetary Fund was warning that if the Fed were to mishandle timing of a gradual move to higher interest rates, it could cause $2.3 trillion in global bond portfolio losses.
So from Day 1 on the new job, any slip-up could trigger an economic calamity.
But when introducing her as his choice, Obama expressed confidence, saying she's "extremely well-qualified" and "renowned for her good judgment."
Most of her peers predict Yellen, 67, will be able to handle the pressure.
"Dr. Yellen is superbly qualified," said a letter signed by more than 500 leading economists who urged the White House to nominate her. "She has shown consistently good judgment in all her roles leading our nation's financial institutions and economic policy."
Even many economists opposed to White House policies have voiced respect for Yellen.
"Her forecasts, as it turns out, have been more accurate" than those who feared the Fed was being too loose with monetary policy, according to Stephen Oliner, a resident scholar at the American Enterprise Institute, a conservative research group.
But some fear Yellen would not be sufficiently tough on inflation. "Janet Yellen believes in higher inflation," according to a statement from Rich Danker, economics director of American Principles in Action, a group favoring "sound" money policies. "Her obsession with printing money raises the risk of higher prices," he said.
Yellen's nomination is subject to Senate confirmation, and she may face opposition from some Republicans.
"I voted against Vice Chairman Yellen's original nomination to the Fed in 2010 because of her dovish views on monetary policy," Senate Banking Committee member Bob Corker, R-Tenn., said in a statement. "I am not aware of anything that demonstrates her views have changed."
Sen. John Cornyn of Texas, the Republican Party's whip in the Senate, expressed reservations, saying Yellen "subscribes to the liberal school of thought" on monetary policy.
But the conventional wisdom, both in Washington and Wall Street, is that she will win approval because of her heavyweight resume.
From her Ph.D. in economics at Yale in 1971 to her current role as Fed vice chairman, her career is packed with accomplishments. Among the highlights: her years on the Fed board; teaching stints at Harvard and Berkeley; service as the chairwoman of President Clinton's Council of Economic Advisers; and her presidency of the San Francisco Federal Reserve Bank.
If approved by the Senate, she would take office in February, after Fed Chairman Ben Bernanke steps down.
"Janet Yellen is supremely qualified to helm the central bank" and will be sufficiently tough on inflation, IHS Global Insight economist Paul Edelstein wrote in an analysis. "We don't anticipate that inflation will run higher than 2 percent during her tenure," he said. Edelstein predicted she would be confirmed.
Yellen and Bernanke have both supported the Fed's monetary stimulus campaign, which has been in effect since the financial crisis began five years ago.
In English, that means the U.S. economy has been in lousy shape since 2008. So the Fed has pushed down interest rates, year after year, to make it easier for businesses to borrow money and for consumers to get home mortgages and car loans. Their goal was to make loans cheap enough to boost the economy, which still has a 7.3 percent unemployment rate.
The Fed wants that to be no more than 6.5 percent.
But earlier this year, Bernanke said it's getting to be time to slowly "taper" down the stimulus efforts. Minutes from the Fed's September policy meeting — which were released on Wednesday — show Fed officials were worried about changing policies at a time when the U.S. economy still looks feeble. But they hope to start making changes by year's end.
Obama's choice of Yellen means current policies will continue for now — and perhaps even a bit longer than under a Bernanke chairmanship. That's because she has often called attention to the need for more jobs.
Earlier this year she said in a speech: "With unemployment so far from its longer-run normal level, I believe progress on reducing unemployment should take center stage" when the Fed is deciding policy.
So as Fed chairwoman, Yellen would have to manage how and when the Fed "tapers" down. If it shifts too quickly, it could choke off growth in the housing market. If it moves too slowly, the immense amounts of cash floating around the economy could start to morph into inflation.
Critics say the Fed's easy-money policy already has gone on too long. In fact, many Tea Party conservatives just don't like the Fed in general, saying it has too much power.
Sen. Ted Cruz, R-Texas, already has said he'll use the confirmation process as some type of leverage to push for legislation requiring a deeper examination of the Fed.