Yellen Getting Fed Hawks to Work With Doves Signals Potential

Janet Yellen, vice chairman of the U.S. Federal Reserve
Fed Vice Chairman Janet Yellen has gained influence by pushing greater transparency and forging consensus. Photographer: Jody Rogac/Bloomberg Markets via Bloomberg

The U.S. Federal Reserve used to be a black box. Big banks employed full-time Fed watchers to study the money markets and guess what the institution was up to. When Janet Yellen was appointed a Fed governor in 1994, it was just six months after the central bank had published for the first time a statement to announce that it had adjusted benchmark interest rates.

How much has changed. The central bank now explains its every move and even discusses decisions to not move. It outlines its view of the future and says what it might do next. The Fed’s pledge to keep rates near zero through 2014 shows how communications and policy actions have melded as Chairman Ben S. Bernanke searches for tools to support a sputtering recovery with no further fiscal help from Congress.

Yellen, 66, has championed transparency and clearer messaging throughout her time at the Fed, Bloomberg Markets magazine reports in its October special issue on the 50 Most Influential people in global finance. As vice chairman the past two years, she has united disparate factions on the 19-member Federal Open Market Committee for a communications overhaul.

The recommendations of an FOMC subcommittee on this topic, which she chairs, have thrust Bernanke into quarterly press conferences and led to the individual interest-rate forecasts of policy makers being made public. In January, her panel even managed to explicitly commit the Fed to an inflation target of 2 percent and to attaining an unemployment rate between 5.2 and 6 percent, their current estimate for full employment.

‘Short List’

“I didn’t walk in here in 1994 thinking this was a key issue I’d be working on,” says Yellen, who was a governor from 1994 to 1997 and served as president of the Federal Reserve Bank of San Francisco from 2004 to 2010. “It’s been a long sequence of steps to get where we are today.”

And where is Yellen today? Possibly in line to succeed Bernanke, whose second four-year stint as chairman ends in January 2014. “In a second Obama term, were Bernanke to leave, Janet Yellen would be at the top of the short list for Fed chair,” says Mark Calabria, director of financial regulation studies at the Cato Institute.

Yellen’s campaign for transparency has made the Fed a more effective steward of the economy, says Alan Blinder, a Princeton University economist who was one of Yellen’s predecessors as vice chairman. “The Fed was once a laggard on public communications,” Blinder says. The early 1990s, in his view, were the end of the Middle Ages. “The Enlightenment was just barely starting,” he says.

‘Leading the Pack’

Especially in the past two years, thanks to Yellen and her working group, the changes have come to fruition, Blinder says. “Because of this latest effort, the Fed is pretty much leading the pack on transparency,” he says.

Bernanke put Yellen in charge of the new subcommittee on the dry topic of “communicating with the public” at her first FOMC meeting as vice chairman, on Nov. 2, 2010. Her panel came to include both inflation hawks, who have dissented from FOMC decisions to add economic stimulus, and doves, who believe the policy-making committee should do more to boost growth and bring down unemployment.

Count Yellen as a dove. She says the Fed can help create jobs with accommodative monetary policy and should tolerate somewhat more inflation to achieve that end.

Richard Shelby, the senior Republican on the Senate Banking Committee, opposed her appointment as vice chairman in 2010, arguing that she would make the Fed less cautious about rising prices. “President Yellen has a Keynesian bias toward inflation in the unrealistic hope that inflation will increase employment,” he said before the vote on her nomination.

Quantitative Easing

Yellen has defended the central bank’s two rounds of asset purchases, or quantitative easing. In a Jan. 8, 2011, speech at an American Economic Association meeting in Denver, she said they created 3 million jobs. As vice chairman, however, she has not always sided with the dovish members as they have pushed for more easing and has never dissented from a policy decision.

Calabria, who previously worked for Shelby as a senior staffer on the Banking Committee, says Yellen has avoided much of the hawk-dove rancor and remains a viable candidate for chairman. “With her experience in the Fed system and academic expertise, she would have a far better chance getting Senate approval, even under Republicans, than others of a similar dovish temperament,” he says.

Inflation Target

Yellen’s influence at the Fed is evident in the January statement on inflation and employment issued by her communications subcommittee and later adopted by the full FOMC. It’s the most precise formulation ever of the Fed’s mission.

The statement specified that the 2 percent inflation target would be as measured by the personal consumption expenditures price index. It assessed the Fed’s ability to affect employment, estimating it should be possible in today’s economy to get joblessness down to 5.2 to 6 percent.

These are matters that excite central bankers and go to the core of the Fed’s so-called dual mandate, which was established by Congress in 1977. The Fed is charged with obtaining both maximum employment and stable prices. Lawmakers left it up to the Fed governors and presidents to determine the best path to these goals and even their definition.

“You’re trying to institutionalize something that is by agreement only,” says Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago. “You want to make it as durable as possible. You can’t do that unless you get the extremes to buy in.”

‘Ideas and Evidence’

John Williams, who was president of the San Francisco Fed after Yellen, says she knows how to find commonalities and build consensus. “Although she has strong views, experience, knowledge and expertise, she’s a person to whom ideas and evidence matter,” says Williams, who served as Yellen’s research director in San Francisco. “She listens to people. She learns from what other people are saying.”

Yellen -- who earned her Ph.D. at Yale University, studying under future Nobel laureates James Tobin and Joseph Stiglitz -- started out on an academic path. She became an assistant professor at Harvard University and might never have made it to the Fed if the university had awarded her tenure. In 1977, she took a job as an economist in the central bank’s division of international finance.

There she met another ambitious young economist, George Akerlof, who worked in the bank’s division of research and statistics. They fell in love over discussions in the cafeteria at the Fed’s Martin Building, known for its panoramic views of the National Mall and mediocre food.


They married in July 1978. Later that year, they left the Fed, first for the London School of Economics and then for the University of California, Berkeley.

Akerlof never returned to the Fed system, but he did fine in academia. He won the Nobel Prize in 2001 with Stiglitz and Michael Spence for their analysis of how markets function when there is asymmetric information -- when one party in a transaction has better information than the other.

“Not only did our personalities mesh perfectly, but we have also always been in all but perfect agreement about macroeconomics,” Akerlof said of Yellen in his autobiography for the Nobel. “Our lone disagreement is that she is a bit more supportive of free trade than I.” That remark is a joke, Yellen says. They agree about trade too.

Akerlof and Yellen were a formidable duo at Berkeley, authoring more than a dozen papers, some jointly and some individually, and together editing a book that examined how the labor market functions.

‘Rip-Roaring Debate’

“There was a rip-roaring debate during the time we were at Berkeley -- in a way it continues to this day -- about the nature of unemployment and what can be done to address it,” Yellen says.

When joblessness is cyclical, the result of a weak economy, it can be addressed by monetary policy. If it’s structural, the result of such things as worker skills not matching employer needs, the steps needed to fix it are mostly beyond the scope of central bank actions.

“This type of argument constantly resurfaces whenever unemployment rises, and it’s alive and well now,” Yellen says. “If you read my speeches, you can see me arguing that the unemployment we have is not structural. It’s cyclical. But you can see some of my colleagues arguing the opposite.”

Having done extensive research on what affects unemployment, Yellen quickly won respect when she became a governor, says Susan Phillips, who was appointed to the Fed in 1991, three years before Yellen.

Typed Remarks

She developed a reputation for rigor and preparation, arriving at meetings with typed-up remarks that she revised as other policy makers at the table spoke, Phillips recalls. “It’s a demonstration of how careful she was,” she says. “She listened to what other people had to say and went through editing her comments to reflect and respond to it.”

With the U.S. unemployment rate stuck above 8 percent for the past three and a half years, there’s definitely room for Fed policy makers to debate their response. As of August, the FOMC had been unable to reach a unanimous decision on monetary policy in more than a year -- and had managed unanimity only four times since 2009. The polarization is even more extreme among the economists and politicians who watch and criticize Bernanke and the central bank.

All the disagreement, though, just puts a higher value on Yellen’s ability to find common ground among Fed policy makers -- and to create new ways to communicate what they’re trying to get done.

Editors: Robert Dieterich, Jonathan Neumann

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