“She calls it like she sees it,” said President Obama in October as he backed Brooklyn-born Janet Yellen to succeed Ben Bernanke as Federal Reserve chair. “She doesn’t have a crystal ball, but what she does have is a keen understanding about how markets and the economy work, not just in theory but also in the real world,” he added, as a humbled Janet Yellen stood smiling by his side.
Yellen’s authority over 300 million Americans and the founding fruit on which they all depend will see her supplant the likes of Christine Lagarde, Angela Merkel, Dilma Rousseff and Hillary Clinton – at least for the time being – as the most powerful female figure in world finance.
Yellen’s authority…will see her supplant the likes of Christine Lagarde, Angela Merkel, Dilma Rousseff and Hillary Clinton…as the most powerful female figure in world finance
As the US returns to the verges of a fiscal cliff, one of Bernanke’s most celebrated protégés must stabilise the economy while somehow putting the breaks on quantitative easing.
Experience and early years
At 67 years of age, Yellen is six years older than the age at which the average American retires. However, with age comes experience, which in Yellen’s case is in no short supply. Having spent three years as the Fed’s vice chair, six heading the San Francisco Fed, two running the CEA and a further three on the Fed Board of Governors, her industry expertise is without compare.
Yellen’s childhood years were spent at Fort Hamilton High School, where she excelled academically and was named valedictorian of her graduating class in 1963. At the tender age of 18, Yellen migrated cross border to study economics at Brown University and in 1970 undertook a PhD at Yale University, which marked the beginnings of what would prove to be an impressive career in economics.
Soon after, Yellen became an assistant professor at Harvard University, served for two years on the Fed’s board of governors, and worked on the faculty of the LSE alongside her husband, George Akerlof. So often seen as second fiddle to the 2001 Nobel Prize-winning economist, Yellen found a perfect companion for bettering her own economic wisdom. “We liked each other immediately and decided to get married,” recalls Akerlof in his Nobel Prize biography. “Not only did our personalities mesh perfectly, but we have also always been in all but perfect agreement about macroeconomics.”
Sticky wages
Nonetheless, as time progressed so too did Yellen’s standing, best evidenced by the New Republic journalist Noam Scheiber calling Yellen for a story, only for her husband to pick up and promptly retort, “Well, I’m a pretty good economist too.”
Together Yellen and Akerlof developed their theory of ‘sticky wages’, which determined that, despite increased earnings, wages are often slow to follow; a principle that Yellen later introduced to the Fed’s fiscal dealings.
The original concept was inspired by an idea to pay their babysitter beyond the going rate, which then saw a string of excellent sitters apply, leading the couple to conclude that this same principle could be applied on a macroeconomic scale to great effect.
The duo’s hypothesis highlighted the market’s inability to reach equilibrium in the event of a downturn and went on to attribute this phenomenon to a number of factors, among them being self-preservation, union activity and regulatory barriers. However, as is the case with many of Yellen’s economic principles, a conclusive reason for the imbalance is yet to be determined.
The original concept [‘sticky wages’] was inspired by an idea to pay their babysitter beyond the going rate, which then saw a string of excellent sitters apply
It did take quite some time for the pair’s theory to be put into practice, however, as the two were forced to wait until 1994 before Yellen was appointed to the Fed’s board of governors. This new role not only saw her fulfil a lifelong ambition to join the institution, but also establish an impressive reputation in the field of economics, and in 1997 she was promoted to the chair of president Clinton’s Council of Economic Advisors. Her career in world finance then passed from strength to strength, as the Bay Ridge resident exercised her dovish tendencies and made a name for herself as an astute economic mind in the process.
Recent analysis by the Wall Street Journal shows that Yellen boasts the best economic prediction record of the 14 Fed employees it examined, ahead of William Dudley, Elizabeth Duke, Richard Fisher and Ben Bernanke, to name a few.
By far the most famous of Yellen’s predictions was in December 2007, when she rightly predicted that a recession could well be on the cards for the US. “The possibilities of a credit crunch developing and of the economy slipping into a recession seem all too real,” she warned, and it is this astute eye for detail and capacity for decision-making that best characterise her long and successful career in finance and economics.
Employment first
Obama’s support is unsurprising given that Yellen’s policies share a certain likeness with the administration’s valuation of employment ahead of inflation. At the Trans-Atlantic Agenda for Shared Prosperity conference in February 2013, Yellen spoke of the three million Americans who had been out of work for over a year and emphasised the importance of combatting this phenomena above all else. “These are not just statistics to me. We know that long-term unemployment is devastating to workers and their families. Longer spells of unemployment raise the risk of homelessness and have been a factor contributing to the foreclosure crisis. When you’re unemployed for six months or a year, it is hard to qualify for a lease, so even the option of relocating to find a job is often off the table. The toll is simply terrible on the mental and physical health of workers, on their marriages, and on their children.
Recent analysis by the Wall Street Journal shows that Yellen boasts the best economic prediction record of the 14 Fed employees it examined
“Long-term unemployment is also a great concern because it has the potential to itself become a headwind restraining the economy. Individuals out of work for an extended period can become less employable as they lose the specific skills acquired in their previous jobs and also lose the habits needed to hold down any job. Those out of work for a long time also tend to lose touch with former co-workers in their previous industry or occupation – contacts that can often help an unemployed worker find a job. Long-term unemployment can make any worker progressively less employable, even after the economy strengthens.”
Jeffrey Frankel, former member of Clinton’s Council of Economic Advisors and professor at Harvard University’s Kennedy School of Government, said, “I very much expect Janet Yellen to continue the policies of Ben Bernanke,” an opinion that echoes the expectations of the many.
For all intents and purposes, the Fed’s policies with regards to inflation look likely to remain essentially unchanged under Yellen, whose background has focused principally on unemployment and whose past remarks have sympathised with Bernanke’s approach. “The mandate of the Federal Reserve is to serve all the American people, and too many Americans still can’t find a job and worry how they’ll pay their bills and provide for their families,” she said in October 2013 at a White House ceremony.
For this reason, it would appear that under Yellen’s regime, an eventual ‘normalisation’ of policy for the Federal Open Market Committee (FOMC) is far from imminent and global markets will continue to depend upon artificial means of support. “Progress on reducing unemployment should take centre stage for the FOMC, even if maintaining that progress might result in inflation slightly and temporarily exceeding two percent,” she said at a meeting sponsored by the Society of American Business Writers and Editors in March.
What will be interesting is to see how Yellen’s focus on unemployment will tie in with recent plans to increase America’s minimum wage. Her belief that decent pay leads to better morale, and consequently higher productivity, suggests that a minimum wage rise may well come into effect when she takes the position. Furthermore, it could be said that the theoretical reasons for raising the minimum wage share a certain likeness with quantitative easing, with each assuming that with more money comes greater productivity.
The problem with bonds
The Fed’s aggressive expansionary policies have seen it pump $85bn of new money into the system every month, consisting of $45bn in treasuries and $40bn in mortgage-backed securities. Although Yellen’s candidacy campaign has seen little opposition, there exist a fair few who remain dissatisfied with the Fed’s seemingly ceaseless bond buying campaign and have proceeded to question Yellen’s stance on the subject in this same vein.
By far the most famous of Yellen’s predictions was in December 2007, when she rightly predicted that a recession could well be on the cards for the US
Critics worry that the Fed’s excessive bond buying will continue for far too long under Yellen’s liberal leadership and that her often overbearing tolerance for inflation could well lead to excesses that bear a certain likeness to the events that preceded the crash.
Among those most disconcerted by the Fed’s policies is Florida’s Senator Marco Rubio, who said in a recent press release that he would vote against Yellen, “because of her role as a lead architect in authoring monetary policies that threaten the short- and long-term prospects of strong economic growth and job creation.” Rubio went on to add, “Altogether, she has championed policies that have diminished people’s purchasing power by weakening the dollar, made long-term savings less attractive by diminishing returns on this important behaviour, and put the US economy at increased risk of higher inflation and another future boom-bust.
“Sound monetary policy established by the Fed is critical for long-term investment and economic growth. Unfortunately, the arbitrary way in which interest rates and our currency have been treated, especially over the last few years, has created asset bubbles and financial uncertainty that limit our economic potential.”
Cause for concern could well be justified given that America’s monetary base is rising rapidly as economic growth trails behind, leading many to fear an eventual bloat of inflationary implications at some point in the near future. Put another way, America’s wealth is but an illusion, and once Wall Street clocks on to this fact, losses could well spiral out of control.
Transparency and tradition
Although opinion is divided on Yellen’s dovish leanings, most are in agreement with her plans to improve upon the Fed’s transparency and better its longstanding and – some say – outdated traditions. The Fed’s history as a hierarchical and male-dominated space appears to be coming to an end, and Yellen’s appointment as the first female chair is the most obvious indication that America’s central banking system is undergoing considerable change.
Yellen’s appointment as the first female chair is the most obvious indication that America’s central banking system is undergoing considerable change
Another of the Fed’s structural changes can be seen in Yellen’s communications strategy, which is among her most impressive achievements to date, and requires a far greater degree of disclosure. “I hope and trust that the days of ‘never explain, never excuse’ are gone for good, and that the Federal Reserve continues to reap the benefits of clearly explaining its actions to the public” she told the Society of American Business Editors and Writers in Spring 2013.
Where once the Fed’s policy was to disclose very little about monetary policy moves, believing that this stance would protect against market overreactions, the existing approach is to trust more in financial markets and accept responsibility for its dealings, however catastrophic. “The Federal Reserve’s ability to influence economic conditions today depends critically on its ability to shape expectations of the future, specifically by helping the public understand how it intends to conduct policy over time, and what the likely implications of those actions will be for economic conditions.”
Although America’s aggressive bond-buying regime at first glance appears radical, Yellen is far from it; instead she is merely a product of a time wherein unemployment and the extreme means by which it is combatted are par for the course. While her appointment to the highest chair in central banking marks the pinnacle of a long and successful career, it also represents the beginnings of a new era for the Fed and for the global economy as a whole.
