What Janet Yellen will do with the nation's purse
How she will run the world's largest central bank differently than Ben Bernanke and what has shaped her views.
washington — When Janet Yellen was declared valedictorian in high school, a profile of her in the student newspaper told of her accomplishments. But it also revealed a seemingly tension-filled interview. The article describes the young Ms. Yellen both interrupting, and being interrupted by, a reporter from the school paper, The Pilot.
"Come now ... you're letting The Pilot go to your head!" Yellen snaps at the interviewer at one point. At another, Yellen reverses roles by becoming the questioner, to which the reporter replies, "No comment!"
Not perhaps normal fare for a 1963 high school newspaper, in which such a story might typically emerge as a prosaic recounting of a top student's academic achievements. But Yellen was not ordinary, even as valedictorians go. For one thing, she was the editor in chief of The Pilot at the time and in that role had opted to write the story. The tension in the room, it turns out, was actually Yellen being interviewed by ... herself.
The relatively short article, viewed in hindsight, hints at several traits that friends and colleagues say are defining ones for Yellen, who is poised to become the next chair of the Federal Reserve, the world's most prominent central bank.
The verbal sparring between Yellen the reporter and Yellen the student was an engaging – and humorous – literary device. But it also shows how Yellen is inclined to ask probing questions and to be interested in people even as she grapples with abstract ideas. Saying "come now ..." and interrupting herself, Yellen revealed not so much a combative personality as someone prone to get to the point and to avoid becoming too proud of her own intellect.
In fact, many people who know her say those points sum up a prominent part of Yellen's persona: She's ultrasmart but also ultramethodical – wanting to think through problems from every angle and with an open mind.
"She was brilliant and a hard worker," says Lois Hedberg, a classmate and friend from those days at Fort Hamilton High School in Brooklyn, N.Y. "I don't think she ever just got along on brilliance."
Her thorough, skip-no-detail approach will be tested in the years ahead as Yellen begins a four-year term scheduled to start at the end of January. Arguably no individual will have more influence over financial conditions for American families. She can't pull the levers of monetary policy all alone, but Fed chiefs traditionally have wielded substantial influence guiding the course of everything from interest rates to the regulatory climate for US banks.
And Yellen, appointed by President Obama to succeed Ben Bernanke, arrives at a crucial time. The central bank today is playing an unusually large role in efforts to revive the economy, because the rest of Washington is mired in partisan gridlock.
"The Fed is the only game in town," says Alice Rivlin, a Brookings Institution scholar who served as Fed vice chair during the Clinton era.
For Yellen, that will mean navigating a difficult course from the moment she occupies the head chair in the Fed's ornate conference room in Washington: trying to move the economy toward more solid growth while also backing the central bank off its stimulative policy of holding short-term interest rates at zero. This will affect everything from unemployment to inflation to stock market portfolios.
How well Yellen performs that task will have another impact, too – on the Fed's reputation. Many critics say the institution seems more attentive to big banks than to the American populace. One of Yellen's challenges will be to defend the notion that the Fed serves all the American people, and that it deserves to remain a largely self-managed institution, free from outside interference by the president or Congress.
Others have labeled her an inflation "dove" who'll allow greater erosion of the dollar's purchasing power – or risk a new housing or stock market bubble – in misguided efforts to reach the goal of a full-employment economy.
She'll be the first Democrat to hold the job since Paul Volcker back in 1987. But even Republicans don't doubt she has the résumé for the position. She's just spent four years as No. 2, the vice chair to Mr. Bernanke. Her career path has led her from prominent teaching positions to varied roles in the Federal Reserve System. Some have called her the best qualified nominee ever.
Yellen will be the first woman to head America's top financial policymaking post. Women have headed regulatory agencies from the Federal Deposit Insurance Corporation to the Securities and Exchange Commission. But the Fed role is far more visible and carries more clout.
No other major central bank around the world – including the Bank of Japan, the European Central Bank, the Bank of England, and the Swiss National Bank – has ever been led by a woman, either. Although Yellen has said in the past that she hasn't felt discrimination during her career, finance remains a male-dominated realm in America. Her elevation carries both substantive and symbolic importance.
"It's very significant, because every time a glass ceiling is broken it sends a signal that government is more inclusive," says Jennifer Lawless, a professor of government at American University in Washington.
• • •
Back in the 1960s, Yellen once accompanied her parents on a transatlantic summer cruise. A highlight for Yellen, then in high school, had to do with learning about rocks. A geologist on board, thrilled to meet a young person with a keen interest in his field, presented her with a trilobite fossil.
She already had a credible rock collection. But instead of eagerly adding the fossil, perhaps 500 million years old, to her personal stash, Yellen loaned it to the biology lab at her school so that others could learn from it, too.
Exploration was a kind of family trademark during her time growing up. Her parents loved to travel, and she went with them to South America and all around Europe.
"They had inquiring minds," says Susan Grosart, who at the time was a close friend of Yellen's.
The melting pot of New York City was itself a kind of global microcosm of arts, sciences, and culture. Ms. Grosart says she and Yellen took it all in.
"Her parents used to include me in their family outings" during grade school, which included plays, concerts, or science lectures, Grosart recalls. Those family times sometimes took place on Wednesday afternoons, when Julius Yellen, Janet's father, would close up his doctor's practice early.
Yet Yellen's youth wasn't all about igneous rocks and high-brow culture. Grosart recalls that one of those concerts that they went to featured a young songwriter coming out of the folk tradition, named Bob Dylan.
Grosart says Yellen was a "very normal kid." "We would talk for hours by phone" about typical subjects such as boys, clothes, and "who said what to whom."
Another former school friend has described Brooklyn's Bay Ridge neighborhood back then as a blend of Irish, Italian, Lebanese, and other ethnic groups, as well as Jewish families like the Yellens. New York City was benefiting at that time from an influx of immigrants displaced by World War II, "many of whom became teachers," the friend, Jacqueline Leo, wrote recently in The Fiscal Times.
Ms. Leo added that "the real gift to teenage girls like Janet and me was the way we were treated by our teachers, our parents and our peers." Instead of being beholden to gender stereotypes, "[w]e were expected to take charge, just as our mothers and grandmothers did when men went off to war."
Yellen was an all-around scholar who, with encouragement from her parents, took an advanced-course track through middle school, allowing her to enter high school as a sophomore and graduate a year ahead of her peers.
Her prowess with language arts propelled her toward the editor in chief role at The Pilot. Yet her self-profile revealed her to be fascinated by science and math. She was fun-loving and showed a ready wit (she said she enjoyed reading philosophy because it helped her "write unpopular essays"), but also seemed to exhibit an unusual degree of discipline.
"She did lots of things, and she did them all really well," says Ms. Hedberg, who was a colleague of Yellen's on The Pilot and another top scholar at Fort Hamilton High. "What stood out to me was intentionality, purposefulness, a determination not to be better than others but to be the best she could be."
Yellen wasn't one to put on airs, Hedberg says. That's a trait that has stuck with her throughout her career at the Fed. Staff economists remember her eating with them in the bank cafeteria.
But she was motivated to achieve. An unsigned editorial in The Pilot at the close of her senior year (Yellen believes she wrote it but, 50 years later, can't be sure) urged a do-something outlook that her own life embraced: "Be curious! Wonder why the sky is blue, what fire is, why peace-loving nations feud ... but wonder about something!"
The valedictorian headed off to college at Pembroke (then the women's college at Brown University) in Rhode Island. Economics quickly drew her in. "She was totally smitten" after her first course, Grosart says, recalling the excitement Yellen shared when returning home on a break.
Graduating with highest honors led to the opportunity to do doctoral work at Yale University, followed by a rare invitation from Harvard University to start teaching there before she had landed a job anywhere else. Yellen's career had begun its upward arc.
• • •
In 1977, Yellen met George Akerlof, another rising star in the field of economics. It was essentially love at first seminar. Or, actually, at lunch after a seminar. This was when the two happened to be working in research positions at the Federal Reserve in Washington. They were married the next year.
"We liked each other immediately," Mr. Akerlof writes in an autobiographical sketch. "Not only did our personalities mesh perfectly, but we have also always been in all but perfect agreement about macroeconomics."
The two collaborated on research even as they were also teaming up to raise a son, Robert.
The scholar spouses shared an interest in mysteries related to unemployment. One influential paper, for example, promoted an explanation for why wages are "sticky" – why they don't drop when a recession hits and unemployment spikes. Their conclusion: Employers know steep wage cuts could affect the morale and productivity of workers. So firms shun the temptation to just pay the lowest wage possible at a given time.
Akerlof's and Yellen's academic lives have been centered around the University of California, Berkeley, where he won a Nobel Prize and she taught for years at the Haas School of Business.
Family interests over the years have included cooking, hiking, tennis, and travel. Yet their dinner table discussions, Yellen acknowledged in 1995, might not be that interesting to an outsider (typically revolving around economics).
But another way to put that might be this: The home environment was stimulating enough that Robert Akerlof, their son, chose to enter the same field and now teaches at the University of Warwick in England.
Yellen took her first policymaking role at the Fed in 1994. She was the junior member of the bank's seven-person Board of Governors in Washington.
Donald Kohn, another longtime Fed official, recalls how an interesting pattern soon emerged. When Mr. Kohn's team of staffers would present economic briefings to the board, Yellen almost invariably seemed to be the one who homed in on the key issue.
"She would find the central point in the briefing, sometimes the central weak point in the briefing. I was often surprised, especially at first," says Kohn, who later held the vice chair role that Yellen would eventually occupy.
It was surprising in part because the other six got to comment or raise questions – starting with Chairman Alan Greenspan – before she, as the newest member, could utter a word.
Kohn's view of Yellen is echoed by Ted Truman, another former Fed official now in the think-tank realm. Mr. Truman knew Yellen back when she was a doctoral candidate at Yale – and he recalls similar signs of a sharp intellect.
Top-flight Yale economist James Tobin turned to her to assist with a graduate class in economic theory, Truman says. Yellen's job was to take notes for the whole class, because Professor Tobin wanted the students to be free to listen and discuss. "They were very elegant and careful notes," Truman says, "and they became classics" that were used again in subsequent years.
• • •
All this may make it sound as if Yellen is a superwoman – someone who crunches numbers about the American economy while wearing a cape. She isn't. But few criticisms of her personally have emerged since she was nominated by Mr. Obama.
She often prefers to speak from prepared notes rather than spontaneously, which some see as a sign of preparation and precision and others see as too programmed. The best shot one Washington gossip news report could take was to chide her for – horrors! – wearing the same outfit to both her confirmation announcement and her confirmation hearing.
Yet she does draw criticism for where she might lead the Fed. On the right, some warn of the unintended consequences of monetary stimulus efforts – from inflation to an out-of-control stock or housing market boom. On the left, one concern is that the Fed is "captured" by the banking barons it is supposed to monitor for risky behavior. The question lingers even though Yellen has called for regulatory reforms that go beyond the 2010 Dodd-Frank Act.
Her confirmation vote, on Jan. 6, was 56 to 26 – the narrowest margin any Fed nominee has ever been approved by. All the "no" votes were cast by Republicans.
Yellen's history at the Fed shows her to be more pragmatic than ideological. It also suggests she can be tough and persuasive when she wants.
Although she's often described as being in the Fed's dove camp – emphasizing the full-employment side of the Fed's "dual mandate" from Congress more than the other goal, price stability – many economists say calling Yellen dovish is misleading. Rather, they see a policymaker who happens to see unemployment as the biggest concern now, but not the only concern.
In the mid-1990s, for instance, she once worried that Mr. Greenspan was being too slow to support a hike in interest rates to stave off inflation. Even more telling may be a Wall Street Journal analysis of forecasts by Fed policymakers since 2009 that found hers to be the most accurate. Her emphasis on the employment side of the Fed's mandate since the recession hit has been irreproachable, her defenders say.
Yet she does harbor deep concerns about joblessness, something rooted in the economic cycles she has witnessed. In a 1995 interview published by the Federal Reserve Bank of Minneapolis, Yellen, when asked about the motivation behind her work, gave a simple answer: "Why are we in this business? It seems to me that it's to promote the well-being of American households. That's what it's all about."
And she put a finer point on it, noting the effect that a deep recession can have. "You can see the visible toll it takes on households," she said.
The example she offered then was the formidable recession that ended in 1982, but this concern is amplified today in the wake of the 2007-09 Great Recession. She and others worry that if lost jobs aren't replaced soon, what started as a cyclical problem – a sudden but temporary jump in unemployment – could wind up leading to long-term joblessness for many individuals. They could lose skills, lose their connections to the work world, and end up dropping out of the labor force.
Yellen is under no illusions that the Fed can magically fix the problem, but she has voiced a "do something" determination to try.
That reflects her longstanding focus, as a scholar as well as a policymaker, on unemployment. But it also tells of a person who, colleagues and friends say, has a deep well of compassion and empathy.
Mary Daly, who worked as a senior research economist in San Francisco when Yellen headed the Federal Reserve branch there, describes her as someone who enjoys making human connections, whether it's with co-workers or with audience members who approach her after a speech.
"When she encounters an individual who's having a difficulty ... she has an enormous amount of compassion," Ms. Daly says. "She just pauses" to listen or be of help.
Wherever she ends up on policy decisions, a central demand on Fed chiefs is to build consensus among the members of an often-divided committee. Economist Alan Blinder – a friend and former colleague of Yellen's on the policy committee – wrote recently that she blends persuasiveness with "the ability to disagree without being disagreeable."
And if that doesn't work, there is always humor, which Yellen has also been known to apply from time to time. Daly recalls being at one San Francisco Fed event that featured life-size cardboard images of bank leaders, including Yellen and herself, who are similar in size, which is to say not very tall. "She thought she was taller than me," but the props seemed to say otherwise. Daly says it prompted a laughter-filled episode in which Yellen insisted that they stand back to back, sans shoes, while other economists helped judge who really had the edge.
"It was a glorious day for me," Daly says, adding that Yellen took the certified – and to her, surprising – loss in stride.
• • •
Yellen's next act will undoubtedly be her most important. Under Bernanke, the Fed quelled a financial panic through various emergency support programs undertaken on its own or in league with the US Treasury. Now the job is less urgent. The word "crisis" isn't in daily headlines. But it's far from an inconsequential moment.
For one thing, she will have to maintain a stable financial system that won't be prone to the kind of financial crisis that struck in 2008. This will mean careful oversight of financial firms, without the kind of overregulation that can stifle the flow of credit.
Yellen will also have to keep the economic recovery going while beginning the long march toward "normalizing" the Fed's monetary policies. This will come in two phases – first, in the gradual withdrawal from a program of big monthly bond purchases designed to keep long-term interest rates low; and, second, in beginning to raise the Fed's short-term interest rate from its post-2008 level of essentially zero percent.
That first step began with a Fed decision in December. Raising interest rates appears further off – perhaps some time in 2015 – given that inflation remains low and economists see plenty of slack in the job market. Some 11.7 million Americans are counted by the Labor Department as either unemployed or as having dropped out of the labor force because of discouragement.
All these recalibrations involve high-stakes decisions. Anything perceived as tightening policy could unnerve global stock and bond markets. But keeping the money spigot gushing for too long carries its own dangers, such as penalizing savers with low interest rates and swelling the Fed's bond portfolio to an unwieldy size.
For now, Yellen stands poised to persist with monetary stimulus. That outlook stems from her reading of the current economy – the still-high rate of unemployment and inflation that's below the Fed's 2 percent target. But it's also a view that connects back to her Brooklyn roots in the wake of a previous financial shock.
"My mother and father were pretty traumatized by the [1930s] Depression," Yellen told a UC Berkeley alumni magazine in 2012. "I remember thinking, 'this is something our country should never live through again.' "
Whichever direction she ends up taking the Fed, she probably won't let her newfound power fill her with visions of grandeur. Because if she does, somewhere deep down inside, there will probably be Yellen the cub reporter telling Yellen the central banker: "Come now ... you're letting this Fed job go to your head!"