Janet Yellen was sworn in as chair of the United States Federal Reserve on February 3rd. Her term will extend to February 3rd, 2018. Yellen is the first female chair of the Reserve and consequently the most powerful woman in the history of finance.
Yellen is also the most qualified chair in the Reserve’s history, given her time served as an official in economic regulation. She was the former chief of the San Francisco Fed for six years and then board member on the Fed Board of Governors for three years, before becoming head of President Clinton’s Council of Economic Advisers (CEA) for two years and was the previous vice chair at the Fed under Ben Bernanke for three years, constituting 12 years of monetary policy making.
A Yale University doctorate, Yellen began her career in economics as a professor at Harvard, then the London School of Economics and finally at UC Berkeley, in 1980. She is married to George Akerlof, a Nobel-laureate economics professor, and they have one son who is also an economist.
Though a very private person, Yellen has reportedly instructed her staffers to refer to her as “chair” instead of “chairwoman,” out of the insistence that she not be treated any differently as a female.
She is reputed for her predictive record as she was was one of very few at the Fed in December 2007 warning of the impending recession. “The possibilities of a credit crunch developing and of the economy slipping into recession is all too real,” she asserted.
The Wall Street Journal gave her the highest ranking of any Fed forecaster, in terms of her predictive accuracy. She is also known for her belief that the public’s “understanding of the Fed’s policies is crucial to their effectiveness,” according to Reuters.
Chief Yellen’s immediate focus will be on further reducing unemployment from 6.7 percent and on keeping inflation down, which stands at 1.5 percent, with the Fed’s current funds rate for financial institutions at 0-0.25 percent. In previous speeches she has stated that “maximum employment” is her main goal. She will also oversee significant reductions in the tapering of monetary stimulus from the Reserve.
However, her first term begins under controversial circumstances, as the Fed has decided to drastically reduce its asset purchasing, which had already begun under Ben Bernanke before her swearing in. This has rattled foreign markets and has caused many in the domestic and global community to express concern, urging various fiscal restraints.
Giving her first testimony in office before the Congressional House Financial Services committee last Tuesday the 11th, Yellen gave her assessment of the current jobs market at the hearing, stating that long-term unemployment numbers were “unusually high” and that the rate of workers who are unable to find full-time employment was “exceptionally high.”
“By a number of measures our economy is not back, the labor market is not back, to normal,” she said. “There’s a great deal of slack in the labor market still.” She also stated that she planned to take “further measured steps” to taper the Fed’s bond buying program.
She had confrontational exchanges with some house Republicans on the committee, some of whom questioned the effectiveness of her chosen fiscal strategies as well as her credibility.
Representative Hensarling questioned as to whether she thought she was a “sensible central banker” given her recent departure from what she had previously deemed “sensible” high interest rate policy. Yellen responded, “Congressman, I believe that I am a sensible central banker.”
Last November, Yellen testified before the Senate Committee for Banking while seeking confirmation for her nomination. During the hearing she asserted that she was in strong favor of continuing the Reserve’s stimulus policy, that has added 4 trillion dollars to the Fed’s balance sheet since the market crash in 2008. However, she made it clear that as chair, she would begin assessing a tapering of the policy without giving a specific timeline for when.
The previous administration’s decision to reduce its monthly asset purchases from banks, also known as quantitative easing (QE), from 85 billion dollars a month to 65 billion into 2014, came suddenly after the last two meetings at the Fed while still chaired by Ben Bernanke. It is anticipated that the program will be halted by the end of the year.
The news has left investors shaky and as a result there has been a downturn in global stock markets, with foreign emerging markets being hit the hardest. The Financial Times has reported that among the countries that have experienced drastic market-fall are Argentina, Turkey, Chile, South Africa, Brazil, and India.
According to Reuters, Reserve Bank of India Governor Raghuram Rajan said the United States “should worry about the effects of its policies on the rest of the world… We would like to live in a world where countries take into account the effect of their policies on other countries and do what is right, rather than what is just right given the circumstances of their own country.”
Being a former chief economist at the International Monetary Fund (IMF), Rajan has gained a favorable reputation among economists as one of very few in fiscal leadership to have spoken out about the inherent market-risks that lead to the severe 2007-2009 financial crises.
Despite the current downward trending in global markets, Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, believes that the economy has been showing improvement and expects further stimulus reductions to halt the program by the end of the year.
“Absent a marked adverse change in the outlook for the economy, I think it is reasonable to expect a progression of similar moves, with the asset purchase program completely wound down by the fourth quarter of the year,” he said.
However, Philadelphia Fed President Charles Plosser, who has been labelled “hawkish,” criticized the wind down as being not enough, soon enough. As a voter on U.S. monetary policy this year, Plosser argued that the job market is “improving rapidly” and inflation “has stabilized.”
“The longer we continue purchases in such an environment, the more likely we will fall behind the curve in reducing the extraordinary degree of monetary policy accommodation,” Plosser explained.
“With the economy awash in reserves, the costs of such a misfire could be considerably higher than usual, fomenting higher inflation and perhaps financial instability… My preference is to scale back our purchase program at a faster pace to reflect the strengthening economy,” he said. “I would like to see purchases concluded before the unemployment rate reaches the threshold, which is likely during the first half of the year.”
Plosser is in the minority opinion at the Federal Reserve, so it is not anticipated that Janet Yellen will adjust her current strategy at Plosser’s recommendation.