This is the biggest challenge Janet Yellen will face as Fed chair

October 8, 2013
Janet Yellen, reportedly President Obama's nominee to be the next Fed chair. (Photo by Robert Galbraith/Reuters)
Janet Yellen, reportedly President Obama's nominee to be the next Fed chair. (Photo by Robert Galbraith/Reuters)

President Obama's decision to nominate Janet Louise Yellen to be the next chairman of the Federal Reserve System is an endorsement of this simple idea: That the central bank's expansive efforts to support economic growth and bring joblessness down are helping the recovery, and should continue. Yellen was the was the obvious choice if -- and only if -- you believe that the current direction of the nation's powerful central bank is the correct one for the country.

Yellen has been not merely an engineer of the Fed's policies of "quantitative easing" and "forward guidance," but a consistent voice within the central bank to go further. She has reliably pushed Chairman Ben Bernanke and his colleagues to explore what else they might do to bring down the 7 percent jobless rate and put the millions of American unemployed back to work.

She is not a monetary perma-dove -- that is always and at all times more worried about jobs than inflation. During the 1990s, as a Fed governor, she tried to persuade Alan Greenspan toward tighter monetary policy. But in the last six years, as the housing boom went to bust, and amid the global financial panic, and oh-so-slow recovery that followed, she has been consistent in her advocacy of stronger action from the Fed to address it.

Her great challenge as Fed chair, if confirmed, will be to decide when and how the central bank should make the pivot from its current orientation, going all-out to try to fight a weak economy, toward one of worrying more about the after-effects of their six years of interventionism. Yellen will inherit a Federal Reserve System with about a $4 trillion balance sheet, accumulated through bond purchases that have propped up prices of assets ranging from U.S. stocks to Indonesian bonds. She will inherit a central bank that has kept interest rates near zero for five years, with a pledge to keep them very low for some time to come.

Yellen, in other words, will have to grapple with what unpredictible ripples might result from the policies she has long advocated.

The hazards of this job became apparent just this past summer. In June, when Bernanke signaled that the Fed might soon slow the rate of its monthly bond purchases below its current $85 billion a month, global markets swooned, with days of volatility resulting from a few, typically soft-spoken words from the man behind the podium at the Fed's headquarters.

Yellen will (assuming she is confirmed) soon sit in that same chair and face a world of challenges. She is as prepared for the job, on paper at least, as anyone who has ever held the job. She has served at the Fed as a governor, president of the San Francisco Fed, and for the last three years as Bernanke's No. 2. She is an accomplished academic economist.

Her challenges will come in some of the things that aren't captured on a resume. How will she perform in a congressional hearing or a news conference (she hasn't testified on Capitol Hill once in her three years as vice chair)? How will she steer the sprawling, contentious 19-person Fed policy committee toward decisions, and avoid the communications snafus that have sometimes undermined Fed policy over the last year?

And above it all, will she have the right judgment to know when the time has come to end continuity with Bernanke-era easy money policies and begin the long road toward normal. She furthermore has to figure out, in this post-crisis world, what normal even looks like anymore.

As is widely know, Yellen was not President Obama's first choice for this job; that was either Timothy Geithner or Larry Summers, the former out of the running due to disinterest and the latter due to Democratic senators who opposed him. But Obama has stumbled into appointing a wildly well-qualified candidate for the job who will also be a barrier-breaker as the first female head of the Fed (or for that matter any of the leading global central banks).

The test for Yellen is whether she now has the judgment and skill to match her qualifications.

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