October 10, 2013

With the government lurching from crisis to crisis, many have speculated on how all the dysfunction might impact the 2014 elections. But here’s something that might end up mattering a lot more to next year’s outcome: The nomination of Janet Yellen as chair of the Federal Reserve.

Aside from the historic aspects of the pick (Yellen being the first woman ever nominated, in addition to being better qualified than any previous chairman), her pick is a rare bit of good news on the economic front. And the simple truth is that, with zero hope of fiscal action from Congress, monetary policy has more power over the economy than anything else, and background economic conditions are the most important thing determining the electoral prospects of the party in power.

In this respect, and many others, Yellen is a great choice for the job. The Fed is supposed to balance inflation and unemployment, and Yellen has been one of the strongest voices in favor of more action on jobs. Rightly so, at a time when inflation has been far below target and unemployment very high. It’s high time the Fed stopped talking about this self-defeating “taper” nonsense and got back to focusing on the labor market. It’s too early to tell for sure, since Yellen was only just nominated, but according to Alex Lazar, Yellen’s initial prospects in the Senate are looking good:

Several key Democratic senators, along with others who have worked professionally with Yellen in the past, are voicing their vast admiration, if not outright support, for her confirmation. The early accolades suggest a far warmer welcome than the one that greeted Summers, who ultimately dropped out of the running amid tough questions from Democrats on his views of financial regulation and his ability to work well with others.

President Obama’s lack of attention to monetary policy has been one of the notably bigger failures of his administration. At the beginning of his administration, he failed to even nominate anyone to empty seats on the Federal Reserve board for over a year, and when he finally got some people appointed in 2012, they turned out to be hawks. As Brad DeLong says, this was a huge unforced error.

Republicans are badly eroding their party’s approval rating with these repeated hostage crises, and newly energized Democrats are speculating that it might be possible to take the House in 2014. Unless House ultraconservatives actually crash the country through the debt ceiling (which would be economically catastrophic even if the Treasury somehow manages to not miss an interest payment), the Federal Reserve will remain the only game in town in terms of the economy. The nomination of Yellen (though it took a big fight to get it) might turn out to be the best news — not just financial, but political as well — the Democrats have had in a long time.