If not Janet Yellen, who? Larry Summers wanted the job, but couldn’t win the support of leftish Democrats and feminists. Former Treasury Secretary Tim Geithner, who can have Ben Bernanke’s job as chairman of the Federal Reserve board for the asking, is said to have told the White House that he doesn’t want the post. Roger Ferguson, former vice chairman of the Fed, is mentioned as a possibility, but with the White House, the justice system, and the national security apparatus already headed by blacks, Ferguson’s appointment would run counter to President Obama’s drive for diversity. Former vice chairman Donald Kohn remains a possibility, but liberals say he was too close to Alan Greenspan. So the odds are that Obama will announce next week that he has pleased his feminist bloc, the left wing of his party, the markets that feast on low interest rates, and emerging economies fearful that high U.S. interest rates will cause a flight to the dollar, by nominating Yellen, now vice chair, for the post Bernanke will have held for eight years. The only opposition would come from Republican senators who fear that Yellen will continue to print money, eventually triggering inflation without making a significant dent in the unemployment rate, and some of Yellen’s Fed colleagues who share that conservative view.
Still, although the odds are that Yellen will get the nomination – she has been cancelling public speeches – that is not certain. The president is said to be so annoyed with senators in his party who shot down Summers, and with those Democrats who are, as he sees it, pre-empting his prerogatives by pressuring him to nominate Yellen, that he might by-pass their favorite candidate. A president who ceded his prerogatives to Congress in the recent Syrian fiasco now wants to reassert it when it comes to appointing a new Fed chairman.
No one doubts Yellen’s economic skills. She is a first-class intellect, widely respected by her international peers, a distinguished economist with long service at the Fed, famous for her careful preparation for Fed meetings, and known for her willingness to consider opposing views. If there is an emollient scale running from one-to-ten, Larry Summers is rated by those who have tussled with him a “one” (that has not been my experience), Bernanke by his colleagues as a “ten,” and Yellen by those who know her as a “five,” courteous but tough enough to manage her staff and confront her colleagues when necessary. One Fed watcher says that if you disagree with Summers he will ask whether you have ever taken a course in economics, whereas if you disagree with Yellen you would become involved in a polite, data-heavy discussion of the sort that so impressed Alan Greenspan when Yellen disagreed with him when he was chairman. “She listens to all sides of a debate,” Jeffrey Lacker, president of the Federal Reserve Bank of Richmond told the Wall Street Journal. Since Lacker wants Yellen to do the one thing it is certain she will not do – end the $85 billion per month QE3 program that keeps the printing presses turning out bits of paper with pictures of our presidents on them – her listening will do him little good.
Even a cursory glance at Yellen’s record supports the view of those who believe she is even more inclined than Bernanke to put off the “taper” (jargon for a slow-down in bond purchases) that so many traders fear. She is not alone among economists when she opts for policies that reflect her nation’s history and her own values and views as to the costs and benefits of the available options. Consider this speech Yellen delivered to a meeting of the AFL-CIO federation of over fifty trade unions some seven months ago. “These [unemployment statistics] are not just statistics to me. Long-term unemployment is devastating to workers and their families. The toll is simply terrible on the mental and physical health of workers.” So, she later claimed, “It is entirely appropriate for progress in attaining maximum employment to take center stage in determining the [monetary] committee’s policy stance.” A Fed chairman so troubled by unemployment is less likely to call a halt to bond purchases than one for whom the long-term inflationary consequences of QE 3 are the top concern, especially when inflation has not reared its ugly head and, as now, the danger of deflation cannot be ignored (prices actually fell in the last quarter for the first time since early-2009).
To say that Yellen is even more inclined than Bernanke to maintain an easy monetary policy is not to say she is necessarily wrong in the context of an economic recovery that remains weak, although in my view not as flaccid as some analysts believe. She can reasonably point out:
· Continued easy money will almost certainly keep the housing sector moving along at a pace unattainable in a higher interest rate environment.
· Many potential car buyers will find finance charges too steep for comfort if interest rates rise, especially since they also will be facing major increases in health insurance costs when Obamacare comes into play in a few days.
· Continued fiscal tightening will create new headwinds, and the replay of the Presidential/Congressional budget follies is unnerving investors, making it unwise to tighten monetary policy just yet. Yellen firmly believes that fiscal tightening creates unemployment, and that easy monetary policy is a necessary offset.
· The labor market, although improving, remains in terrible shape. The unemployment rate is too high, the labor force participation is too low, too many of the recently created jobs are low-paying and/or part-time, with the consequences she cited in her speech to the trade unions.
Yellen might add that when it comes to monetary policy no Fed chairman can hope to get it precisely right. So he, or more likely she, must weigh the cost of too much loosening for too long against the social and economic cost of too much tightening too soon. My guess is that, like Bernanke, who believes the Fed tightened too soon during the Great Depression, Yellen would prefer to err on the side of keeping rates too low too long. Doubt that history matters and compare that view with those of German central bankers, reared to fear inflation far more even than recession.
That said, even Yellen knows this addiction to debt and mounting piles of fiat money must stop some day. Artificially low interest rates will eventually distort asset values, interfere with incentives to save, redistribute an intolerable amount of wealth from savers to spenders on cars and houses, and trigger inflation, among other evils.
Yellen knows that, and says, “When the time has come, am I going to support raising interest rates? You bet.” My guess is that the time will come for Yellen well after it would have arrived for Summers, and even after arrives for most of her current rivals, and even for Bernanke.