The Senate is set to approve Janet Yellen as head of the Federal Reserve Board on Jan. 6, when it returns from the holidays, assuring that the Brooklyn-born economist will take the reins of the central bank at a time when the economy appears, ever so slowly, to be pulling itself out of the worst economic slump since the Great Depression.
What will a Yellen Fed look like? The markets have been asking that question for months, and yesterday, with the Federal Open Market Committee’s decision to begin dialing back the Fed’s monthly purchases of government-issued securities while simultaneously promising an even longer period of near-zero interest rates, we got a preview.
The answer: A Yellen Fed will be, above all, cautious.
There had been vigorous debate in the financial press leading up to the FOMC announcement, about whether the central bank would begin the so-called “taper” now, or wait until the early part of 2014. Yellen was seen by most as more committed than even Bernanke to the Fed’s strategy of “quantitative easing” through the purchase of government securities.
Yesterday’s decision struck a middle ground. The Fed decision indicates that policymakers, even as they pull back on the direct stimulus of asset purchases, want the market to understand that the “easy money” policies of the past several years will not change in the near term.
Yellen did not discuss the decision herself, but reporters questioning outgoing chairman Ben Bernanke in a press conference asked the obvious question: Was Yellen fully supportive?
Yes, Bernanke said. Yellen had been closely consulted on the decision, and was on board.
There is good reason – beyond the fact that she voted for it -- to believe that Yellen really is a strong supporter of yesterday’s move. The Fed, with the dual mandate of controlling inflation and reducing unemployment, has a strong interest in maintaining continuity in the management of monetary policy. Unexpected shifts by the central bank can rock the market in ways nobody can predict, so it is virtually unthinkable that yesterday’s decision is something Yellen will override when she takes charge.
Further confirming the likelihood of continuity is current speculation that Yellen’s second-in-command at the Fed will likely be Stanley Fischer, the former head of Israel’s central bank.
Yellen and Fischer come from vastly different backgrounds.
Yellen, a Ph.D. economist, was raised in Brooklyn, educated at Brown and Yale, and went on to be president of the Federal Reserve Bank of San Francisco and chair of the White House’s Council of Economic Advisors under Bill Clinton before becoming Fed vice chair in 2010.
Fischer was born in Mazabuka, a town in what is now Zambia, in the southern part of Africa. He moved to the United States as a teenager and holds dual US-Israeli citizenship. Fischer spent several years in Israel before studying at the London School of Economics, earning his Ph.D. in economics at the Massachusetts Institute of Technology. He is a former senior official with both the World Bank and the International Monetary Fund and was for a time vice chairman of Citigroup.
However different their roots, Yellen and Fischer have similar outlooks on the role of the central bank.
Yellen has been a vocal supporter of the fed’s activist role in supporting the economy through monetary stimulus, and is largely seen as a monetary “dove” – that is, she appears to consider unemployment a greater concern than inflation.
Fischer, it is important to note, was Ben Bernanke’s thesis advisor at MIT, and was an early advocate of an activist role for the central bank in financial crises, indicating that he too can be expected to support the central bank’s continued efforts to stimulate the economy.
What is unclear is whether Yellen and Fischer share a similar commitment to the level of central bank transparency that Bernanke has seen as vital to the Fed’s success in fulfilling its dual mandate of controlling inflation and maintaining full employment.
Yellen, it is clear, is very much in favor of openness.
With regard to the Fed’s public pronouncements, she told a gathering of business writers earlier this year, “I hope and trust that the days of ‘never explain, never excuse’ are gone for good.”
Fischer, by contrast, said at a conference earlier this year that, "You can't expect the Fed to spell out what it's going to do...Why? Because it doesn't know."
So if nothing else, it seems pretty clear that policy under the Yellen Fed will be very similar to policy under the Bernanke Fed. The big question is whether the influence of Fischer will limit how much the markets know about it.
This article has been corrected to reflect that Janet Yellen has not yet been confirmed by the Senate. It was further updated on Dec. 20 to reflect the new timetable for the Senate's action on Yellen's nomination.
Follow Rob Garver on Twitter: @rrgarver
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