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Despite ‘taper’ delay, Yellen still favourite to head Fed

Janet Yellen, vice-chair of the Board of Governors of the U.S. Federal Reserve System, delivers a speech at the International Monetary Conference in Shanghai in June. Ms. Yellen is considered the runaway favourite to replace Ben Bernanke as head of the U.S. central bank.

Eugene Hoshiko/The Associated Press

When Ben Bernanke wanted to explore how to better explain the U.S. Federal Reserve's thinking to the public, he turned to Janet Yellen for advice.

It was a logical choice. Since October, 2010, Ms. Yellen has served as the Fed's No. 2, put there by President Barack Obama, who could nominate her as soon as this week to succeed Mr. Bernanke as head of the Washington-based Federal Reserve Board – the world's most powerful central banker.

Ms. Yellen's work as the head of an internal committee on communications so far has led to an inflation target and a promise that the Fed won't raise its benchmark interest rate before the unemployment rate drops to 6.5 per cent.

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Yet after a rocky couple of days for financial markets last week, Ms. Yellen's work on Fed messaging stands both as a signature endeavour and a potential blot on her résumé. It exemplifies her status as a leading thinker – but Wall Street suddenly is less-than-enthusiastic about the Fed's communications strategy.

Ms. Yellen voted with the majority Wednesday as the Fed's policy committee shocked financial markets by delaying the start of what will be a long walk back to a more normal setting for monetary policy. The Fed said economic data simply weren't strong enough to begin unwinding stimulus. That's not the message most investors and analysts thought the Fed was sending ahead of last week's meeting, and many on Wall Street say the Fed has lost credibility as a result.

"The decision has generated uncertainty about the Fed's intentions, just at a time when markets were craving conviction in the course of U.S. monetary policy," said Joseph Carson, U.S. economist and director of global economic research at asset-manager AllianceBernstein.

If the Fed has lost credibility, the vice-chairwoman has too. How much is open to debate, as is whether it matters. Wall Street angst probably won't sway Mr. Obama, especially since the Fed opted against curbing its monthly bond purchases for a valid reason – because it remains unsatisfied with progress in the labour market.

"This is a volatile, manic-depressive market," said Jared Bernstein, a senior fellow at the Washington-based Center on Budget and Policy Priorities who served as Vice-President Joe Biden's chief economist. "You don't want to unnecessarily surprise the markets, at the same time your bigger client has to be the broader economy."

Still, the events of last week cast a certain pall over the ascendency of Ms. Yellen, who, according to Massachusetts Institute of Technology economist Simon Johnson, could be the "best-qualified potential Fed chief ever."

Her experience as a central banker runs deeper than that of her boss. She ran the San Francisco Fed for the six years preceding her appointment as vice-chairwoman of the Federal Reserve Board, where she served previously as one of seven governors from 1994 to 1997.

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Born in Brooklyn, New York, during the Second World War and educated at Yale University, Ms. Yellen is cast as the soul of the Fed, a grandmotherly figure who cares infinitely more about the unemployment rate than the inflation rate. "These are not just statistics to me," she told the AFL-CIO earlier this year. "We know that long-term unemployment is devastating to workers and their families."

In the jargon of Fed watchers, that makes her a "dove," although apparently one who is unafraid to use her talons.

According to Fed records, she challenged former chairman Alan Greenspan during debates in the 1990s over whether the central bank should adopt an inflation target, and later called on Mr. Greenspan to raise interest rates during the technology boom. As San Francisco Fed president, she fatefully spotted a housing bubble that few others saw.

Ms. Yellen would be the first woman to lead a major central bank. If that happens, she will have the liberal wing of the Democratic Party to thank.

The White House appeared to be leaning toward Harvard economist Lawrence Summers, if only because Prof. Summers – a former treasury secretary who led the National Economic Council during the financial crisis – and Mr. Obama are close.

Yet Prof. Summers shares the responsibility for the loosening of financial rules during the 1990's that some blame for the crisis. At least four Democratic lawmakers on the Senate Banking Committee said they would vote against Prof. Summers, tipping the balance of power on the committee to the Republicans.

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Prof. Summers removed himself from consideration a week ago, telling Mr. Obama in a letter that a nomination fight would be too acrimonious. Ms. Yellen has been the runaway favourite to replace Mr. Bernanke ever since.

"She and Bernanke are among the only folks in town who are actually still trying to help the economy," Mr. Bernstein said. "I'm sure the Democrats like that."

Adrian Miller, director of fixed-income strategy at GMP Securities in New York, said he's heard a few of his Wall Street counterparts grumble about Ms. Yellen in the aftermath of the Fed decision. He predicted they would get over it. "Yellen and her eventual leadership should not be materially impacted by this week's grumpiness," Mr. Miller said.

No one could better clear the air than Ms. Yellen. But that will have to wait. The Economic Club of New York said late Friday that Ms. Yellen has postponed a speech scheduled for Oct. 1.

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More


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