What Yellen's Fed will look like

The dovish Janet Yellen will stand her ground with steely determination as she weighs up the Fed’s withdrawal of bond-buying stimulus.

Confirmation that the White House will nominate Janet Yellen as the new head of the Federal Reserve should give some measure of comfort to financial markets currently frozen into inactivity by the political stalemate in Washington.

Yellen, who has refrained from making policy sensitive comments in recent months while the nomination process was underway, has been a strong advocate of the Fed’s unconventional quantitative easing program since its inception.

Of the Fed’s twin mandates – employment and inflation – Yellen has often leaned towards policy that is supportive of job creation and economic growth, and has argued less often for keeping inflation low. In Fedspeak, she has been at the dovish end of the spectrum of policymakers, arguing against several other Fed officials who are concerned that current easy money will fuel future inflation.

Yellen has been vice chair of the Fed since 2010 and prior to that was president of the San Francisco Federal Reserve, governing the largest of the Fed’s 12 regional districts across the entire western United States and raising warnings about the real estate market as early as mid-2007 (California proved to be the epicentre of the housing bubble). She was the head of the Council of Economic Advisers in the Clinton administration.

Despite the poisonous atmosphere in Washington as the Republicans continue to play chicken with the rest of the world on a potential United States debt fault, the nomination to the top Fed position is expected to be approved by the Senate. The far more contentious and divisive candidate, Harvard professor Lawrence Summers, withdrew last month as it became clear that Democrats would not support his nomination.

Steeped in both Fed practice and academic theory on fighting unemployment from her background at the University of California, Berkeley, she has been a strong supporter of Fed chairman Ben Bernanke’s successive waves of stimulus: slashing the benchmark federal funds rate close to zero and then embarking on unprecedented bond buying on a massive scale to hold down long-term borrowing costs and stimulate the economy.

Indeed, Yellen’s greatest policy challenge will be to manage the withdrawal of stimulus, a delicate balancing act that Bernanke unexpectedly postponed last month. In view of the subsequent stalemate over the federal budget talks, that has proved a prudent decision – but it does add difficulty to timing the start of bond-buying scale backs.

Yellen has three more Federal Reserve policy meetings to attend as vice chair before taking over in January when Bernanke’s second term expires, providing her nomination is approved. That will give the Fed ample time to finesse its strategy and forewarn markets that stimulus is on the way out – provided the economic data allows it. (If the US federal government remains shut for much longer, last week’s historic absence of a nonfarm payrolls report will pale in comparison to the gaping hole of official data, leaving only private surveys such as the ISM to give clues on the pace of the economic recovery.)

Yellen is credited with a steely determination in sticking to her economic views, and confidently held her ground against the domineering and legendary former Fed chairman Alan Greenspan when he argued in 1996 for trying to push inflation close to zero. Some inflation was better than none, she argued. Yet the debates with other Fed governors and presidents were always “collegial”, one former regional Fed chief Alfred Broaddus has said.

The news of Yellen’s impending nomination spread instantly through the twittersphere and was even retweeted by the likes of Ms. Magazine (“excited”) – an indication that the breaking of the glass ceiling by the first female head of the Federal Reserve will be heard far and wide. If Yellen makes it to the top of the Fed, it will also provide a poetic counterpoint to Summers’ erstwhile view of women’s lesser aptitude for the sciences. The most powerful policymaker governing the world’s largest economy would argue otherwise.

Victoria Thieberger is a former US Federal Reserve correspondent for Reuters.

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