The New Face of the Fed: Yellen on Money, Policy and the Markets

When former Treasury Secretary Larry Summers somewhat abruptly yanked his name from consideration as the new Fed Chair last month, it paved the way for Fed Vice Chairman Janet Yellen to become the instant front-runner. President Obama officially nominated Yellen for the job this week. It was a relatively easy nomination. She seems a likely and logical successor to current Chairman Ben Bernanke and will be the first woman to run the Central bank of the United States.

Yellen’s background is a portrait of distinction and service. Her robust resume includes time at the University of California Berkeley’s Hass School of Business as a distinguished Professor of Economics. She is also past CEO of the Bank of San Francisco and former Chair of the Council of Economic Advisers under President Bill Clinton. Add to these notable positions another full decade of service within the Federal Reserve, and she could very well be the most qualified Fed Chief in US history.

The Fed Chair is considered among the most powerful positions in the country and, if confirmed, Yellen will join the ranks of Alan Greenspan, Paul Volcker, Arthur F. Burns and William Martin.

The Fed Chair is charged with setting short-term interest rates, overseeing the banking regulatory system, setting Federal monetary policy, and weighing in on matters of the global economy.

As the new Fed Chief, Yellen will be given formidable economic tools and weighty fiscal authority to impact the borrowing, spending, lending and overall density of the US money supply … directly impacting the life of every American citizen in matters of savings, retirement, investments, home ownership, inflation, employment, etc.

So what style or theory of fiscal stewardship will Yellen bring to the Fed? She is considered a traditional Keynesian in the sense that she believes in direct government intervention and aggressive Fed action to invigorate the economy. She has advocated in the past for easy money policies to address high unemployment which is among her pet peeves. In that sense she is likely to defend and continue all of the extraordinary measures and rounds of stimulus that were commandeered under current Chair Bernanke.

Often called a “monetary policy dove,” Yellen is closely aligned with Bernanke in terms of money creation as a solution to economic stagnation. She is known to be hard on unemployment and soft on inflation and has little reservation about expanding the US money supply. It is unlikely that she will rush easing.

Upon accepting the President’s nomination yesterday, Yellen stated, "We can and must safeguard the financial system."  While this is in many ways a pat statement, it is also a tell-tale articulation that could forecast doom for currency valuation.  Will the Federal Reserve continue to have its hands around the throat of the dollar?

So we can expect a relatively smooth transition from Bernanke to Yellen next year, but what remains to be seen is the level of commitment she will bring to shrinking the Fed’s portfolio of bonds. When to do it, and how to do it, without crashing the markets and collapsing the economy … could very well be her biggest legacy even before her term begins.

(Image Source: http://www.whitehouse.gov)