Janet Yellen: How nominee would shape Federal Reserve policy

President Obama's nominee for second-in-command at the Federal Reserve, Janet Yellen, is 'dovish' on inflation – she's not likely to tighten monetary policy to counteract it.

Price Chambers/Reuters/File
Federal Reserve Bank of San Francisco President Janet Yellen arrives at the Jackson Hole Economic Symposium in Jackson Hole, Wyoming in this August 21, 2009 file photo. Ms. Yellen is President Obama's nominee for the No. 2 spot at the Fed.

Janet Yellen, nominated by President Obama to assume the important No. 2 role at the Federal Reserve, said Thursday that the economy is recovering from recession, "but the pace is not sufficient to bring down unemployment very rapidly."

She spoke before the Senate Banking Committee, which must consider whether to confirm her nomination to be vice chairman of the Fed's board of governors in Washington. Her comment on the economy fit with her reputation as more worried now about boosting growth than about the risk that Fed policies will create inflation.

Ms. Yellen, currently president of the Federal Reserve Bank of San Francisco, would occupy a powerful position close to Chairman Fed Chairman Ben Bernanke. The outgoing vice chairman, Donald Kohn, has done much to shape the Fed's overall stance on monetary policy in recent years.

So who is Yellen?

She's an economist, and she's had lots of experience on both sides of Fed operations: at its Washington headquarters as a member of the board of governors, and more recently as head of one of 12 regional Fed banks, which keep tabs on local economies around the nation.

Among the Fed's regional bank presidents, some are viewed as "hawks" and some as "doves" on inflation. Yellen falls into the dovish camp.

These are relative terms. Hawks don't lack for worry about the nation's high unemployment rate, or the risk of deflation if monetary policy fails to encourage growth following a deep recession. And doves aren't immune from concerns about inflation. But the two camps do differ. The hawks will be sooner to act to tighten monetary policy during an economic expansion.

"Job creation must be a high priority of monetary policy," Yellen said in her opening statement before the Senate committee Thursday. "But we must also avoid any threats to price stability. That means that, when the appropriate time comes, we must withdraw the extraordinary monetary accommodation now in place in a careful and deliberate fashion," she said.

At a time when the Fed has drawn its share of public criticism – including questions in some quarters about whether the Fed should exist at all – Yellen also used her appearance to defend the notion that the nation needs a central bank free of political interference.

"When central banks are independent, economies perform better, inflation is lower and more stable, and long-term interest rates are lower and less volatile," she said. But she added that the Fed is by law accountable to Congress and the public, to explain its actions and earn society's trust.

She promised to be, as Bernanke has been, an advocate of greater transparency by the Fed.

Yellen's academic background includes degrees at Brown University (undergraduate) and Yale (doctorate, in 1971). She has taught at Harvard, the London School of Economics, and the University of California, Berkeley.

She outlined her view of the economy in greater detail in an April speech. She expects a gradual rebound in consumer and business spending, likely leaving "unemployment stubbornly high for the next few years."

The human toll of the recession, she said, means that "we simply can’t be complacent." She added that the job market could mean that inflation pressures remain muted.

"I’m one who believes that persistently high unemployment tends to depress inflation. When so many people are without jobs, wages and incomes generally rise slowly, and producers and retailers have a hard time making price increases stick. We see this today."

By contrast, in a recent Fed meeting, one hawkish member of the policymaking committee argued that the central bank should stop promising to keep interest rates low (the short-term rate is essentially at zero percent) for "an extended period." Thomas Hoenig, who heads the Fed bank in Kansas City, argued that the committee needs to start creating some leeway for a possible boost in interest rates in months ahead, if the economy starts showing signs of inflationary pressure.

Yellen's appearance came a day after the Fed downgraded its forecast for the economy this year, from about 3.2 percent growth down to 3 percent growth.


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