Fed chair is always a hard job. Yellen is inheriting an even harder one.

October 9, 2013

It’s official. It was a long and strange journey getting to there, but now Janet Yellen, barring unexpected confirmation problems, will be the 15th chairman of the Federal Reserve System.

With the Yellen appointment, President Obama is ensuring that the powerful U.S. central bank will be led for the next four years by someone who shares the basic philosophy that Ben Bernanke has brought to the job: that the central problem facing the U.S. economy right now is high unemployment. That the Fed can — indeed is obligated to — use its tools to try to fix that, even if those tools aren't ideal for the job. That monetary policy, whatever its limitations, is a powerful tool to try to make life better for millions of ordinary Americans.

While the basic philosophy atop the Fed will not be changing, what has changed in the eight years of Bernanke’s leadership are the details of the job the chairman must take on.

When Bernanke became chairman of the Federal Reserve on Feb. 1, 2006, this was the organization he led: It had $861 billion worth of securities on its balance sheet, almost all of it in simple treasury bonds. The Fed’s most recent policy statement was a simple 110 words long. The chairman never took on-the-record questions from the media. The Fed regulated banks, but that job was considered  a backwater within the organization. The idea of the Fed bailing out an investment bank or an insurance company was downright preposterous. The unemployment rate was 4.7 percent.

When Yellen takes over the job this coming Feb. 1 (assuming the Senate confirms her on time), she will likely inherit an organization more like this:

A $4 trillion balance sheet stuffed with all manner of financial exotica, from mortgage-backed securities to portfolios acquired as part of the 2008 bailouts of the likes of Bear Stearns and AIG. Policy statements are now north of 700 words that explain not just the stance of Fed policy but what the central bank expects to do far into the future. She will be expected to continue the practice of quarterly news conferences, or maybe even to turn them into an every-meeting, eight-times-a-year affair. And the organization she will run has the power to regulate any financial company, bank or otherwise, that endangers stability — combined with a newfound recognition that if you don't regulate the financial system well, it can cause disaster. The unemployment rate is 7.3 percent.

To lead the Fed or any major central bank has always been an impossible job. To be a great central banker, a person must be an excellent economist, diplomat, politician, communicator, administrator  and regulator — a mix of skills almost no one on Earth possesses. Indeed, Yellen comes closer to having the full mix of experiences you want in a Fed chief than either Bernanke or his predecessor, Alan Greenspan; she has more extensive experience as a central banker than the two of them had combined before starting as chairman.

But because the Fed Yellen inherits is even more complicated than those led by Bernanke and Greenspan, so too will be her challenges.

What unpredictable ripple effects is the multi-trillion Fed balance sheet having for the global economy, and how much should Fed leaders account for those in their policymaking? What is the interplay between the Fed’s low interest rate policies and excessive risk-taking in different corners of the financial world that could create new bubbles? How do you apply the lessons of the crisis to regulate banks and other institutions more effectively, implementing the immensely complicated Dodd-Frank Act? Does the very transparency that Bernanke has spent his chairmanship pushing create problems of its own, markets hear so much information about what the Fed is thinking and doing that there is unnecessary volatility?

Yellen has made her greatest mark as a thinker about employment and monetary. But as chairman, it will now be her problem to come up with answers to this full gamut of questions.

In her comments Wednesday at the White House ceremony announcing her appointment, Yellen began by emphasizing the human impact of the recession, and the obligations of the Fed to help deal with it.

“The mandate of the Federal Reserve is to serve all the American people,” Yellen said. “And too many Americans still can't find a job, and worry how they'll pay their bills and provide for their families. The Federal Reserve can help if it does its job effectively. We can help insure that everyone has the opportunity to work hard and build a better life.”

Yellen is as accomplished as anybody on Earth in grappling with the questions of how the Fed might do exactly that — and that’s why the president appointed her. But her ultimate success will come not just from helping put America back to work, but from mastering the broad complexities of what is, now more than ever, an impossible job.

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