Soft-Spoken Yellen Wields Outsize Influence as Fed's No. 2

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Published August 05, 2012

| Reuters

If the Federal Reserve delivers another jolt of monetary stimulus to try to stir the U.S. economy back to life, it will be in part because of the powers of persuasion of a soft-spoken, former Berkeley professor.

From her corner office just down the hall from Chairman Ben Bernanke's, Janet Yellen is one of the most influential economic policymakers in the world, backing bold action by the U.S. central bank at a time when much of Washington treats "stimulus" as a dirty word.

With Congress and the White House locked in an election-year stand-off over spending and taxes, the Fed looks to be the only institution willing or able to stop the weak recovery from faltering yet again.

Power at the Fed is concentrated in a few hands - chief among them Bernanke and his No. 2 Yellen - even if the bank strives for consensus among its broader group of top officials.

That distillation of power makes Yellen hugely influential on policies that impact the world's largest economy and the rest of the globe.

"Her influence at the Fed has increased steadily," said Alfred Broaddus, a former president of the Richmond Federal Reserve who served with Yellen when she joined the Fed almost 20 years ago and often disagreed with her.

"I think she is now, along with the chairman and one or two others, one of the most influential people in the system," added Broaddus.

'DREAM COME TRUE'

Some observers think Yellen would be an obvious pick to run the Fed, if President Barack Obama wins re-election in November and if Bernanke has had enough of being chairman after his term expires in January 2014. She turns 66 on August 13.

Obama chose Yellen for the central bank's No. 2 position in 2010, drawing on both her academic credentials and previous experience working in a Democratic administration.

The child of Brooklyn doctor who saw patients in the family home, Yellen earned top honors at Brown University before opting to pursue a career in economics after hearing Yale University economist James Tobin speak.

Tobin, a Nobel prize-winning economist and an economic adviser to President John F. Kennedy, was heavily influenced by John Maynard Keynes, who argued governments can avert deep economic contractions like the Great Depression of the 1930s by increasing public spending.

Yellen was energized by Tobin's combination of theoretical accomplishment with public service.

"There was something about his strong sense of morality and social responsibility that greatly impressed me," she said in an interview with Reuters in July. Her meticulousness is legendary. Her notes of Tobin's lectures were so complete that students circulated copies of them as study guides.

In 1994, while teaching at the University of California at Berkeley, President Bill Clinton's White House asked her to serve on the Fed Board of Governors.

"I had thought about that from the time I had gone into economics, so that was like a dream come true to me," she said.

One of then-chairman Alan Greenspan's early assignments for Yellen was to argue against explicit inflation targets in a mock debate with Broaddus, a noted anti-inflation hawk.

Ironically, given her role-playing in the debate, Yellen turned out to be an early supporter of inflation-targeting in the face of opposition from Greenspan.

Almost 20 years on from that exploratory discussion, the Fed this year announced its own inflation target of 2% a year, after a long campaign by Bernanke.

"I'm just opposed to a pure inflation-only mandate in which the only thing a central bank cares about is inflation and not employment," Yellen says now. "I've never been opposed to having a numerical objective. I don't think the committee can operate intelligently unless people can agree on what we're trying to accomplish."

NOT ONE TO WING IT

Yellen is a stickler for preparation, writing out in detail the comments she delivers to Fed meetings rather than talk based on her notes as some of her peers do.

"She's not somebody who wings it," said someone who has worked with her and who spoke on condition of anonymity.

"She doesn't win the argument by tearing apart what people say. She wins by putting on the table such a carefully constructed set of arguments that other people subscribe to those."

In June, she launched a push for serious consideration of more monetary stimulus, citing the weak U.S. labor market and the dangers of contagion from the euro zone's debt crisis.

Her words to the Boston Economic Club left financial markets and many observers with a clear sense more help was on the way for the economy, a view that only grew this week when the Fed signaled it was edging closer to a possible third round of bond-buying.

Yellen has previously played the role of Fed communicator.

In the fall of 2010, a second round of bond purchases drew howls of protest at home and abroad. Critics said it raised inflation risks and unleashed wild flows of money into developing countries.

Yellen used a speech in January 2011 to rebut the criticisms one by one: the U.S. unemployment rates was due to slow demand, not a skills mismatch as many other economists argued; there was no risk of new asset bubbles forming; flows of capital into other countries could be beneficial; and, finally, what was good for the U.S. economy was good for the world.

"She's taken communication to a new level," said the former associate. "Those speeches she gave, they were dense, they were excellent analyses ... of the way the Fed's looking at the economy."

ENOUGH PROBLEMS ALREADY

Yellen's rise at the Fed comes at a contentious time for the central bank. Three years after the recession was officially declared over, the jobless rate remains above 8 percent, the depressed housing market is only beginning to show signs of recovery, and consumers are reining in spending. Detractors on both sides of the aisle in Congress and elsewhere argue that the Fed either is spinning its wheels or attempting too much.

While she brings her own perspective to the policy-making table, Yellen strives for consensus within the Fed's ranks.

"Certainly an important part of what I try to do in my role on the committee is take my personal point of view and try to explain it as clearly as I possibly can and advocate for it," she said. "But it's not just 100 percent that. I do absolutely understand that the committee needs to make a decision and we need to find something to do that can command sufficient support."

Nonetheless, she is an unabashed defender of Fed activism in order to meet the employment part of its dual mandate, along with keeping inflation low and stable.

"I absolutely feel that monetary policy has an impact on employment and output, and not only on inflation," she said.

Yellen is challenged regularly by her foils at the central bank. Philadelphia Fed President Charles Plosser questions whether further bond-buying would work and warns that reliance on unconventional policies could hurt the Fed's credibility.

Jeffrey Lacker, who took over the Richmond Fed from Boaddus, doubts the Fed can lower the jobless rate much. "Expectations for what the Federal Reserve - what any central bank can do for real growth and labor market outcomes - have become overinflated," he said in July.

Yellen thinks the central bank still has tools in its arsenal, even after buying $2.3 trillion in bonds and holding interest rates close to zero for nearly four years.

"But monetary policy is not a panacea," she said. "There are questions about the efficacy of unconventional policy tools and their use may entail some cost."

Despite her image among some of her critics in Congress as being soft on inflation, Yellen dismisses suggestions that setting higher inflation targets could spur consumer spending and economic growth.

"If you just went out and said you're trying to raise inflation expectations, the average household would just think, 'Oh my God, we have so many problems already, and now you want to make the cost of everything higher?' I don't think that's confidence-inducing," she said.

FIRST FED CHAIRWOMAN?

If Obama needed to find a replacement for Bernanke, he could make the historic decision to appoint Yellen as the first woman to lead the U.S. central bank. But she would likely face tough scrutiny in Congress and beyond.

First, she would likely have to show she isn't willing to risk the Fed's hard-won, inflation-fighting credibility to lower unemployment. Republican Senator Richard Shelby voiced that concern when voting against Yellen to be vice chair in 2010.

"President Yellen has a Keynesian bias toward inflation, in the unrealistic hope that inflation will increase employment," he said.

That's an oversimplification, say former colleagues.

"I don't think Janet is soft on inflation - she recognizes and understands those risks," Broaddus said.

She might have to deflect questions about her role as head of the San Francisco Fed when her region was one of the most troubled spots in the housing bubble. Firms associated with the worst excesses in the housing crisis, like Washington Mutual and Countrywide Financial, were located in the western district.

The Fed was not responsible for overseeing those firms, but Yellen could be asked why her institution did not spot the warning signs.

She could argue almost everyone was caught off guard by the crisis and some major banks under the San Francisco Fed's supervision, such as Wells Fargo, came through with little damage.

However, her saving grace may be her candor about that period.

"We failed completely to understand the complexity of what the impact of the decline - the national decline - in housing prices would be in the financial system," she said at her confirmation hearings.

Still, Yellen has built her reputation on her ability to link scholarship and research to central bank decisions that affect many peoples' lives, taking that connection a step beyond even her mentor, James Tobin.

"She is a terrific macro economist," said Donald Kohn, who preceded Yellen as Fed vice chair.

"She is very smart. She knows the literature, she marshals her arguments very carefully for what she sees as the right side of policy," said Kohn, now a fellow at the Brookings Institution. "It's that respect that she is held in, even by the people who disagree with her, and the reasoning she brings to bear, that are influential."

 

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