When Yellen Speaks World Listens as Fed Plans U.S. Course
“The job of the Fed chair is not just, you know, our top monetary-policy maker,” Obama said during remarks announcing her nomination Oct. 9. “The world looks to the American Fed chair for leadership and guidance.”
If Yellen wins Senate approval and rises from vice chairman to succeed Chairman Ben S. Bernanke early next year, she will not only need to unite the Federal Open Market Committee around a strategy for unwinding unprecedented stimulus. She also will face a community of international central bankers concerned about the effect of the Fed’s policies on their economies and fiscal policy makers -- around the globe and at home -- struggling to agree to anything.
“When it’s the U.S. turn to talk, absolute quiet reigns in the world because they want to hear,” said Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics and a former economist in the Fed’s international finance division. “She’s a top-notch academic from the get-go and she’d be head of the Fed, the most powerful economy, first among equals among central banks.”
As well as taking center stage at any international gatherings, she will be empowered to dispense an unlimited supply of liquidity if the world stumbles into another financial crisis.
“People always want to blame their problems on someone else,” Gagnon said. “And the most obvious someone else is always the U.S. and in central banking that means the Fed.”
Tensions between U.S. policy makers and their international counterparts simmered at this year’s Economic Policy Symposium sponsored by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming. Fed officials were pressed by international policy makers to spell out their intentions better in the interest of safeguarding global growth.
Adapting to advanced countries’ exit strategies is “the most pressing challenge for emerging economies,” Mexican central bank Governor Agustin Carstens said at the gathering in August.
“There are concerns about how she will manage an increasingly obstreperous committee and an increasingly agitated larger community of central bankers,” said Philippa Malmgren, the president and founder of Principalis Asset Management in London. “Let alone how she will manage Congress over the budget issue.”
Yellen is familiar with the complaint that Fed policies are wreaking havoc abroad. She was an attendee and moderator at this year’s symposium, and she was at the central bank in 2010 when foreign policy makers said quantitative easing was flooding their economies with too much liquidity.
Her past remarks show that she is prepared to press on with stimulus until unemployment falls or inflation rises, even if it has consequences abroad.
“It’s not the intention of the U.S. and Fed to make this more difficult,” she said at an International Monetary Fund event in Tokyo last October. “On balance, stronger U.S. growth is beneficial for the entire global economy.”
Yellen is deeply committed to the Fed’s dual mandate, assigned by Congress. She chaired a subcommittee within the FOMC that spelled out the central bank’s goals as 2 percent inflation and maximum employment, which the committee currently estimates to be an unemployment rate between 5.2 percent and 6 percent. Since becoming vice chairman in 2010, she’s never given a speech on monetary policy that didn’t refer to the dual mandate.
“As the world’s most important central bank, there’s a lot of things that can happen when they change policy, but at the end of the day, what they’re given by Congress is full employment and price stability,” said Jay Bryson, global economist for Wells Fargo Securities in Charlotte, North Carolina. “It doesn’t say anything in there about currencies in the rest of the world.”
Yellen, 67, is familiar to many central bankers overseas. She has been a regular attendee at the Jackson Hole symposium, which draws policy makers from around the world. As San Francisco Fed president from 2004 until 2010, she also has presided over an annual conference on economies of the Pacific Basin.
Her nomination for the top Fed post came as finance officials from around the world gathered in Washington for annual meetings of the IMF and World Bank.
“I have a lot of respect for her,” said Felipe Larrain, Chile’s finance minister, in an Oct. 9 interview in Washington. “She’s highly respected and, for me, she means continuity from Bernanke.”
Among her international admirers is Christine Lagarde, the managing director of the IMF who told reporters Aug. 1 that Yellen is “my friend,” and she “is a very competent woman.”
Lagarde told not-for-profit organizations gathered at the World Bank Oct. 10 that she wanted to “celebrate there’s a woman who’s been nominated to head the Fed.”
“I trust Janet to be a fantastic communicator,” Lagarde said. “She’s on message, she’s very rigorous, very strict and I know when she has to communicate something, there will be no misunderstanding and no room for fuzzy messages. Not that there has been any in the past.”
During her tenure as Fed vice chairman, Yellen has maintained a busy international travel schedule, flying to meetings of regulators and central bankers in London, Paris, Zurich, Basel, Bern, Helsinki, Mexico City, Tokyo and Shanghai.
“She’s been off and on in the official sector now for almost 20 years and before that a very high-profile academic, so I think she knows on a personal basis the key players,” said Nathan Sheets, the former head of the Fed’s international-finance division and now global head of international economics at Citigroup Inc. in New York. “Yellen is much more a known commodity amongst international officials than Bernanke was when he was appointed.”
Some emerging market central bankers said that Yellen’s nomination may give their economies a reprieve from the risk of an immediate reduction of stimulus.
“I expect her to consider well the ripple effects on other countries” from policy decisions such as altering the Fed’s bond-buying program, Choi Hee Nam, director general of the South Korea finance ministry’s international finance bureau, said by phone from Sejong Oct. 9.
Koichi Hamada, an adviser to Japanese Prime Minister Shinzo Abe, said Yellen is “more likely to seek a way to make an economic recovery certain by keeping policy accommodative.” If prospects of an exit weaken, that may put pressure on the yen to rise, risking harm to Japan and boosting the need for the Bank of Japan to act, said Hamada, who doesn’t speak for the government.
Unconventional monetary policy like the Fed’s has “undesirable side effects” in emerging markets even while helping stabilize the global economy, Carstens said in his speech in August.
“What would have the most impact right now would be to have a much better, clearer implementation of the tapering,” Carstens told central bankers. “If you keep pampering the markets, the inflow of capital can be such that more stability risks can be accumulated in emerging-market economies.”
On May 22, Bernanke told Congress that the Fed could begin reducing bond purchases in the “next few meetings” and over the next month emerging-market stocks lost more than $1 trillion in value.
“They should probably have been more aware of how their announcements would shake up markets in general, and emerging markets as part of that,” said Jerry Webman, the chief economist at OppenheimerFunds Inc. in New York, with $209 billion in assets under management. “I’m sure she has all the chops to know about this now. She was sitting at the No. 2 position in May.”
Emerging markets have some reprieve from the central bank’s Sept. 18 decision to postpone reducing their $85 billion in monthly bond purchases. The MSCI Emerging Markets Index recovered that day to the highest level since May.
“They know a lot more about the implications of their actions for global markets than they did four months ago,” said Webman.
As Fed leader, Yellen would have a role -- alongside Governor Daniel Tarullo, who has taken the lead in setting new regulations following the financial crisis -- in guiding international discussions about how to make the financial system safer.
In a June 2 speech in Shanghai, Yellen said that regulators need to continue international collaboration by completing the Basel III international bank-capital standards program, resolving “thorny cross-border obstacles” that could thwart regulators from winding down a failing bank with operations in many countries, and increasing scrutiny of so-called shadow banks. Shadow banks are institutions like hedge funds that facilitate the creation of credit outside the regulated banking system.
The Fed also has worked with international counterparts during the crisis and provided as much as $583 billion in liquidity to foreign central banks’ via swap lines. Through these arrangements, the Fed loans dollars to other central banks including the European Central Bank or Bank of England, which they then lend to financial institutions in their regions.
Her approach may be very similar to Bernanke’s, said Bryson of Wells Fargo, when it comes to using the Fed’s balance sheet in an international crisis.
“I would not expect her to be radically different,” he said. “If Bernanke thought extending swap lines or increasing swap lines would be appropriate, I think 99 out of 100 times Janet Yellen would say the same things as well.”
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