Janet L. Yellen stepped into the top job at the Federal Reserve last year with more experience than anybody who has led the central bank in its 100-year history. But she is finding that success demands not just economic expertise, but a political prowess she is still learning to master.
As the Fed prepares to tackle the controversial task of unwinding years of support for the economy, Yellen has grappled with fractious colleagues and dissent within one of the world’s most influential financial institutions. Outside the Fed, liberal lawmakers and some of the world’s top economists are urging her not to move too fast, for fear that the economy is weaker than it seems. She has also clashed, sometimes acrimoniously, with conservatives trying to rein in her power, while several Republican presidential candidates have slammed her record on the campaign trail.
The Fed will meet in less than two weeks to decide whether to finally raise interest rates. Many analysts say the vote has been clinched by Friday’s strong jobs report, which showed that the economy last month added 211,000 jobs and that the unemployment rate stayed at 5 percent.
The decision will be Yellen’s biggest test. She declined to comment for this article, but documents and interviews with more than 20 associates reveal how Yellen is trying to navigate this challenging moment. Her goal is to forge consensus within the Fed while being responsive to Capitol Hill’s critiques — all without hampering the policies that she says has helped keep the U.S. economy on course.
“I don’t think we know the kind of stress that she feels,” said Laurence Meyer, founder of Macroeconomic Advisers and one of Yellen’s former Fed colleagues.
The leader of the Federal Reserve is often described as among the most powerful people in the world. But in late summer, as the Fed weighed whether to raise interest rates for the first time in nearly a decade, Yellen found herself outnumbered.
Yellen wanted to wait. The wild swings in global financial markets over the summer were potentially bad omens for China’s economy — which in turn could drag down America, she feared. But her colleagues were not as worried. A slim majority of the 17 people who make up the central bank’s top brass was willing to start pulling back the Fed’s support for the recovery in September.
In a close call, Yellen’s job was to tip the scales.
She cleared her calendar for two days in the week before the Fed’s vote. In back-to-back calls and one-on-one meetings in Washington, she argued her case and listened to her colleagues’ concerns. The central bank ultimately voted to wait, and a majority of officials publicly supported her position.
“We want to take a little bit more time to evaluate the likely impacts on the United States,” Yellen said after the meeting.
The Fed steers the nation’s economy by setting a target for interest rates, which influences everything, including the cost of a mortgage, corporate debt and the value of the dollar. When the Fed wants to jump-start the economy, it lowers the target rate to encourage consumers and businesses to spend. Raising the rate helps slow down an overheating economy.
For the past seven years, the Fed essentially has been flooring the gas. It slashed rates to zero in 2008 and has kept them there ever since. And when that wasn’t enough, it began pumping money into the recovery, to the tune of about $3.5 trillion.
But the country is no longer in crisis. Yellen took the helm at the central bank early last year with a mission to return the economy — and Fed policy — back to normal.
“This is a huge call because no one can ever be certain,” said Adam Posen, president of the Peterson Institute for International Economics.
Snowy-haired and petite, Yellen, 69, is an academic at heart, chronically early and frequently armed with stacks of notes at public appearances. She spent two decades teaching at the University of California at Berkeley and now is professor emeritus there. Yellen was also on the Fed’s Washington-based board of governors in the 1990s and head of the San Francisco Fed in the 2000s before being appointed the second-in-command at the central bank in 2010. President Obama once joked that her idea of a fun family vacation was a trip to the beach lugging a suitcase full of economic textbooks.
“She’s a very wonderful, elegant woman, who has a great sense of humor,” her husband, Nobel Prize-winning economist George Akerlof, told The Washington Post. “We attempt to get together for dinner at night, and we both have a laugh about whatever has happened to us from the previous day.”
The two met in the Fed cafeteria when they both worked there in the 1970s and now live in Georgetown. Yellen maintains such a low profile that during her first G-20 summit as Fed chair, security personnel asked her for identification. While former chairman Ben S. Bernanke famously went to the office seven days a week, Yellen prefers occasionally to work from home, sitting alone at her desk and drinking coffee.
Presenting a united front is essential to the central bank, especially as it has veered into uncharted territory. Former central bank chairman Alan Greenspan employed a top-down approach to the Fed’s decisions, making his opinions known before asking for input from his colleagues. Bernanke spearheaded a shift toward more open internal debate and a transparent culture.
Most Fed officials now say the economy will be ready to start standing on its own by the end of the year. After September’s delay, Yellen said in public remarks this week that she will “look forward” to raising interest rates as a sign of the recovery’s strength. Yet three of the Fed’s top officials have explicitly advocated waiting until at least 2016 to move. Joining them are prestigious institutions such as the International Monetary Fund and the World Bank.
Yellen has been systematic about building internal consensus. Before every meeting of the Fed’s top ranks, she surveys each official individually through phone calls and meetings, sometimes more than once. Privately, one colleague joked that he angles for a later appointment to allow more time to prepare. Former Philadelphia Fed President Charles Plosser, who often disagreed with Yellen, said her approach was “full bore.”
“There was a fair amount of give and take, and I think they were healthy and good discussions,” Plosser said. “Sometimes at the end of the day, you agree to disagree, but that’s okay.”
Rep. Jeb Hensarling (R-Tex.) minced no words as he made the case from the House floor recently for a controversial bill that would tighten lawmakers’ oversight of the Fed. “Greater accountability is a necessity,” he said. “Otherwise, we may soon awake to discover our central bankers have morphed into our central planners.”
The proposal overwhelmingly passed the Republican-led House last month in a largely party-line vote, the latest salvo in the often testy relationship between the central bank and a Congress that has watched warily as the Fed expanded its powers after the financial crisis.
Yellen has adopted an aggressive tone in fending off efforts to rein in the central bank. In a letter issued just days before the House vote, she criticized a provision that would require the Fed to follow prescribed rules in setting interest rates as “misguided.” The Fed won the backing of the White House, which threatened to veto the bill. And she dismissed a similar proposal that was under consideration in the Senate over the summer. “I suppose I would ask, what exactly is the problem?” Yellen said at the time.
Yellen initially struggled to navigate the often-thorny relationship between Congress and the Fed, miffing Hensarling when she did not immediately reach out to him after being appointed to lead the Fed, according to a person with direct knowledge.
The Texas lawmaker is head of the House Financial Services committee and is now leading an investigation into an alleged leak of information at the central bank in 2012, alongside a separate inquiry by the Fed’s inspector general and the Justice Department.
Yellen has since stepped up her outreach to Republican lawmakers and has spoken directly with Hensarling over the phone about the investigation into the alleged leak. But the political climate for the Fed could become more toxic if a Republican moves into the Oval Office.
“Janet Yellen, for political reasons, is keeping interest rates so low that the next guy or person who takes over as president could have a real problem,” GOP front-runner Donald Trump recently told Bloomberg Television.
The long wait may finally be over.
In a speech at the University of Massachusetts at Amherst, Yellen explained why she still has faith in the Fed’s models of the economy — and why the time to raise rates is sooner, rather than later. The address was delivered in her trademark style: 22 pages long with 34 footnotes, nine graphs, four pages of references and an appendix.
She argued that she didn’t need to see evidence that skeptics wanted — higher wages and rising inflation — to start raising interest rates. And she pushed back against the idea that the economy was permanently wounded and needed constant support. But she also admitted the limitations of the Fed’s economic models. The central bank has made mistakes before, and Yellen pledged that the Fed would move slowly to wean the recovery off its stimulus.
“Her speech there is the kind of thing she would talk about in class,” said Tom Pugel, an economics professor at New York University who took Yellen’s course in macroeconomics when he was a young doctoral student at Harvard University. “You’re still seeing someone who comes at this from a professorial point of view.”
Yellen’s mentors included Nobel Prize-winning economist James Tobin, who was among the advocates for aggressively lowering the unemployment rate during the 1960s, even if it meant tolerating higher prices. Academics hotly debate the influence that period had in stoking the runaway inflation that gripped the country in the 1970s.
Yellen’s critics fear that the Fed is making the same mistake once more by waiting too long and risks moving too slowly down the road — and the consequences may not be apparent for years to come.
“The play’s not over,” said Richard Fisher, the former head of the Dallas Fed who frequently sparred with Yellen. “You only determine how successful it was if you can unwind it.”
Financial markets say the likelihood that the Fed will finally increase interest rates in December is close to 80 percent. But investors are much more skeptical about the central bank’s ability to keep hiking rates. Within the Fed, new divisions are emerging over how fast and how high interest rates should rise. The decision in December is just the first step.
Yellen described her own recipe for success in a speech last year at the graduation ceremonies for New York University at Yankee Stadium. Unsurprisingly, the theme of her remarks was the importance of hard work — or what she called “grit.”
“One aspect of grit that I think is particularly important is the willingness to take a stand when circumstances demand it,” Yellen told the crowd. “Such circumstances may not be all that frequent, but in every life, there will be crucial moments when having the courage to stand up for what you believe will be immensely important.”