It is in all likelihood that as Daily Pfennig® edition readers begin this editorial, the U.S. Federal Reserve will have its first female Federal Reserve Chairman in the 99-year history of the institution, and only the second woman ever to lead a central bank for a developed nation.1 By the end of this year, the full Senate will likely confirm Dr. Janet Louise Yellen as the next chairwoman of the Federal Reserve.
After receiving approval by a 14-8 margin from the Senate Banking Committee, Dr. Yellen is all but assured to win a majority vote from the full Senate. In fact, Dr. Yellen is as well-known an associate of the Federal Reserve Board as any prior Federal Reserve Chairman, having 12 prior years of experience in setting the central bank’s monetary policy. Dr. Yellen served as a member of the Board of Governors between 1994 and 1997 under Chairman Greenspan, the President and CEO of the Federal Reserve Bank of San Francisco from 2004 to 2010 under Chairman Bernanke and, most recently, serving as the Vice Chairman of the Board of Governors since 2010.2 Dr. Yellen was also the Chairman for the Council of Economic Advisors between 1997 and 1999 during the Clinton presidency.3
Similar to Chairman Bernanke’s background, Dr. Yellen’s career before settling into the central banking milieu was primarily in academia, graduating from Brown University in 1967 as Valedictorian of her class, receiving a PhD in economics from Yale University in 1971, and later teaching at Harvard University as an assistant professor until 1976.4 Between 1977 and 1978, Dr. Yellen worked as an economist for the Federal Reserve Board of Governors, where she met her husband, George Akerlof, the Nobel-prize winning economist. She later taught at both the London School of Economics and the Haas School of Business at the University of California, Berkeley.
As a seasoned member of the Federal Reserve, Dr. Yellen has gained the respect of many politicians, banking members, and market observers alike. In a study conducted by The Wall Street Journal in July 2013, Dr. Yellen was ranked as the overall most accurate Federal Reserve forecaster for predictions made on inflation, the labor market, and growth expectations.5 The study examined more than 700 forward looking passages in speeches and testimony given between 2009 and 2012, and tallied each statement with a subjective accuracy rating between +1 and -1. Dr. Yellen earned the top spot among all 14 Fed members over this time with an overall score calculated at +0.52, indicating her predictions were “consistently in the right direction.” In comparison, Ben Bernanke was ranked #5 receiving an overall score of +0.29 for his individual comments. When making comments on behalf of the collective view of the Federal Open Market Committee (FOMC), Bernanke’s predictions received a +0.19 score placing it in the #10 slot.6
Traces of Balance and Independence
Few can argue Dr. Yellen’s intellect, qualifications, or impressive curriculum vitae, but that does not necessarily indicate the type of Federal Reserve chairman for which she will eventually be known. It is easy to assume, as many market pundits have, that Dr. Yellen will continue the philosophy and policies the Fed has followed under the leadership of Ben Bernanke, but this may be a simplification of her reputation as generally supporting Federal Reserve monetary expansion.
This single-minded preconception belies some of her actions under various Federal Reserve administrations, where Dr. Yellen has shown a rational degree of independence. In July 1996, Dr. Yellen was at odds with then-Chairman Greenspan with respect to his objective for driving interest rates to zero, believing that wage inflation posed a larger risk to the economy at that time.7 Dr. Yellen and Lawrence Meyer, considered an inflation hawk, were said to have approached Greenspan in partnership later that year to remind Greenspan of the Fed’s need for vigilance against inflation, yet were allegedly dismissed by Chairman Greenspan at that time.8
Dr. Yellen subsequently showed her independence of thought throughout 2007 when Chairman Bernanke and the broader FOMC began recognizing that a crisis was unfolding in the subprime mortgage market, but believed the U.S. economy was strong enough to withstand a downturn in the real estate market.9 In May 2007, Dr. Yellen stating that while the FOMC was comfortable forecasting stable housing prices, she was more concerned that pricing levels would fall.10 At the subsequent FOMC meeting in June 2007, Dr. Yellen reiterated her concerns, stating “the risks of further significant deterioration in the housing market, with housing prices falling, causes me appropriable angst.”11 Nevertheless, in comments made in the public domain during that period, Dr. Yellen appeared less critical of the FOMC’s stance in the housing market or with respect to the accommodative strategy of the Federal Reserve.12
What to Expect from a Yellen Federal Reserve
Dr. Yellen’s testimony to the Senate Banking Committee likely provides the best indications as to the philosophy she intends to establish for her tenure heading the Federal Reserve. Dr. Yellen believes that while the private sector has created 7.8 million jobs since the 2010 low, and home prices and sales are up “significantly,” she believes the Fed “has farther to go.”13
Dr. Yellen testified that the unemployment rate currently remains too high (at 7.3% in October 2013), and expects that inflation will continue to run below the Fed’s 2.0% target “for some time.”14 In fact, Dr. Yellen helped lead the effort to adopt the Fed’s 2% inflation goal, and believes that interest rates should remain at zero, at least until the unemployment rate falls below 6.5% as long as inflation remains below 2.5%.15 Moreover, she currently does not view equity market valuations as being overextended.16
Time will be the ultimate gauge as to what type of Federal Reserve chairwoman Dr. Yellen will become. For now, we can be fairly certain that Dr. Yellen will likely maintain the same monetary strategies that her predecessor has followed for the last few years, at least until unemployment levels drop to a more sustainable level. How Dr. Yellen’s Fed ultimately reacts to the seemingly inevitable inflationary pressures resulting from the Fed’s monetary initiatives will remain to be seen.
Until the next Daily Pfennig® edition…
Assistant Vice President
EverBank World Markets, a division of EverBank
P.S. Do you think Dr. Yellen is the right person to chair the Federal Reserve? Post your comments below.
1. “11 Things You Should Know About Janet Yellen,” The Telegraph, November 14, 2013
4. “Janet Yellen: Timeline of Her Career,” The Wall Street Journal, October 8, 2013
5. “Ranking Fed Forecasters,” Andrew Phillips, Jon Hilsenrath, and Kristina Peterson, The Wall Street Journal, July 29, 2013
7. “Federal Reserve’s Yellen: Fearless and Candid,” Paul Davidson, USA Today, September 2, 2013
9. “Fed Slow to Grasp the Crisis in 2007 as Yellen Sounded Alarm,“ Craig Torres, Bloomberg News, January 18, 2013
12. “Caught in the Act: Bald-Faced Lying by a Federal Reserve Official,” Robert Wenzel, Economic Policy Journal, January 21, 2013
13. Janet Yellen testimony at the Senate confirmation hearing before the Committee on Banking, Housing, and Urban Affairs, November 14, 2013
15. “Federal Reserve’s Yellen: Fearless and Candid,” Paul Davidson, USA Today, September 2, 2013
16. “Janet Yellen: No Equity Bubble, No Real Estate Bubble, and No QE Taper Yet,” Augustino Fontevecchia, Forbes, November 14, 2013