Yellen’s Quake-Proof Calm Needed to Guide Fed Easing Exit
When the deadly Loma Prieta earthquake struck San Francisco in October 1989, then-professor Janet Yellen was working in her sixth-floor office at the University of California at Berkeley.
Rather than reacting with alarm, she remained at her desk until she was urged by her colleague, Andrew Rose, to join him under a door frame where they would be safer.
“I was sure the building was going to collapse and I was going to die,” said Rose, co-author of a number of research papers with Yellen, who is now vice chairman at the Federal Reserve in Washington. “But she was quite calm right through the earthquake. I don’t think she said a thing.”
That composure should serve her well now that she’s about to be nominated by President Barack Obama to become the next Fed chairman and the first female leader of the central bank in its 100-year history. Obama will announce his choice at 3 p.m. today, a White House official said in an e-mail.
If approved by the Senate, she will ascend to the top of the world’s most powerful central bank for a four-year term at a time when its balance sheet has swollen to more than $3.7 trillion, even as the economy continues to struggle.
“She has one of the most challenging tasks the Federal Reserve has ever had,” said Laurence Meyer, who served with Yellen on the Fed board in 1996 and 1997 and is now senior managing director at St. Louis-based Macroeconomic Advisers LLC. Yellen will confront “very difficult decisions” on monetary policy that are going to be “controversial” inside the Fed and in financial markets.
Just how hard was highlighted by wide swings in the financial markets during the last four months as investors reacted first to suggestions by outgoing Fed Chairman Ben S. Bernanke that the central bank would scale back its bond-buying program and then to news on Sept. 18 that it had decided, for now, not to. Since Bernanke’s first hint of action on May 22, the yield on the Treasury’s benchmark 10-year note has swung from 2.01 percent to a two-year high of 2.99 percent on Sept. 5 before settling at 2.63 percent at 5 p.m. yesterday in New York, according to Bloomberg Bond Trader prices.
The 67-year-old Yellen brings a wealth of experience to the Fed chairman job. All told, she’s spent almost a dozen years as a policy maker at the central bank, half of that as president of the Federal Reserve Bank of San Francisco.
A meticulous macroeconomist, Yellen has a reputation as one of the Fed’s more dovish officials because of her focus on unemployment. She’s a “fierce advocate” of its dual mandate to promote price stability and full employment, Meyer said.
In spite of her identification as a leading dove, Yellen has shown an ability to forge consensus with the more hawkish, anti-inflation members of the Federal Open Market Committee -- a quality that could come in handy as the central bank wrestles with when and how to unwind all the stimulus it has pumped into the economy.
“She’s quite aware of her analytical polish and capabilities -- but she uses it as forcefully and persistently as necessary but not more so,” said Jim Wilcox, a professor at the University of California’s Haas School of Business in Berkeley.
Wilcox, who said he fought “intellectual battles” with Yellen when they lunched together at the university, described their encounters this way: “She would smilingly disabuse me of all sorts of suppositions, implications that I might offer.”
Yellen’s resume does have some holes. She’s never been a front-line crisis fighter and lacks direct experience in the financial markets. And while she has given numerous speeches, her unscripted public appearances have been less frequent.
While Yellen took part in efforts to quell the 2007-2009 crisis as president of the San Francisco Fed, “she wasn’t in first seat” in confronting the turmoil, said Alan Blinder, vice chairman of the Fed from 1994 to 1996 and now a professor of economics at Princeton University in New Jersey.
Blinder, who co-authored a book with Yellen, said he isn’t sure she’ll be able to present the calming public persona that might be important in a crisis.
“You never know until people get called upon to do that,” he said. Blinder, who helped recruit Bernanke to join Princeton’s economics department in 1985, said the same observation could have been made about him before he became chairman and showed that he was up to the role.
It isn’t an idle concern. The Fed’s policy of keeping short-term interest rates pinned near zero for an extended period increases the odds another crisis could occur.
“Our fear, from a risk perspective, is you may end up generating an asset bubble somewhere,” said Michael Gapen, a senior U.S. economist at Barclays Plc in New York.
Gapen, a former researcher in the Fed’s Division of Monetary Affairs, played down the importance of Yellen’s lack of first-hand crisis-fighting experience, arguing that the institution is well-versed in this regard.
Yellen’s ability to handle herself publicly will be tested when she has to appear before the Senate Banking Committee considering her nomination. Richard Shelby of Alabama, then the senior Republican, opposed her appointment as vice chairman in 2010, arguing she would make the Fed less worried about rising prices.
Allan Meltzer, author of a two-volume history of the Fed, echoed that concern, saying Yellen’s zeal to reduce unemployment could lead to a “replay” of the 1970s, when overly lax monetary policies led to a burst of inflation.
“She’s pretty dovish,” said Meltzer, a professor at Carnegie Mellon University’s Tepper School of Business in Pittsburgh. “She will repeat the mistake that the Fed has made many, many times -- that is, delaying concern about inflation until inflation rises.”
Her supporters take issue with that assessment.
“She knows more economic history than most economists,” said Rebecca Blank, who served with Yellen on the Council of Economic Advisers in 1998 and 1999 and is now chancellor of the University of Wisconsin-Madison. “Janet is not a one-note economist. She would adapt to the times.”
At the council, Yellen showed an ability to handle the “101 issues that come at you every day” without losing her poise, Blank recalled. “She was unflappable” and “always thoughtful and measured in her responses.”
The soft-spoken Yellen was a standout from the start. When she graduated from Fort Hamilton High School in Brooklyn, New York, in 1963, she won the Phi Beta Kappa award, the Mayor’s Committee Scholastic Award, the mathematics award, the science award and the overall English department prize, in addition to being class valedictorian.
She attended Pembroke, Brown University’s women’s college, where she was one of only a few students majoring in economics. Yellen says she choose the subject because it provides a logical way to grapple with questions related to human welfare.
“I was of a generation that still was affected by the Great Depression,” she said in an interview in 2011. “I didn’t live through it, but my parents grew up during it.”
She received her Ph.D. from Yale University in 1971 after studying under future Nobel laureate James Tobin, a forceful advocate for government intervention in the economy.
“The perspective of those who studied with Tobin at Yale was that the government has an affirmative responsibility to offset the instabilities of the private economy,” said James Galbraith, another Yale Ph.D. who worked on the Humphrey Hawkins Act of 1978, which affirmed the Fed’s obligation to pursue stable prices and maximum employment.
Tobin at the time was engaged in a public debate with another Nobel laureate, Milton Friedman at the University of Chicago, about economics, particularly monetary policy, said Richard Cooper, who was at Yale from 1963 to 1977.
Friedman argued that the Fed lacked the ability to manage the ups and downs of the economy and instead wanted the central bank to focus on controlling inflation through steady growth of the money supply, according to Cooper, who is now a professor at Harvard University in Cambridge, Massachusetts.
“They had a high degree of mutual respect, but Tobin thought Friedman, particularly in his monetary economics, was dead wrong,” Cooper said.
Yellen’s first job after leaving Yale was assistant professor at Harvard. She might never have made it to the Fed if the university had awarded her tenure. She joined the central bank in 1977 as an economist in the central bank’s division of international finance. There she met her future husband George Akerlof, who was working in the bank’s division of research and statistics and would win a Nobel Prize in 2001.
They fell in love over discussions in the cafeteria at the Fed’s Martin Building, known inside the central bank for its panoramic views of the National Mall and mediocre food.
The two eventually ended up in Berkeley at the University of California, where they wrote more than a dozen papers, some together and some individually. They also edited a book examining how the labor market functions.
“George is more loosey-goosey, more casual, with flashes of brilliance,” said Rose, who co-wrote papers with both of them. “Janet helps to separate the wheat from the chaff. She’s incredibly sensible and allows you to think very carefully and rigorously about the ideas.”
A favorite of students, Yellen twice won the award as teacher of the year, according to Rose, a professor at the university’s Haas School of Business since 1986, who described her teaching style as “slow and methodical.”
“She’s a super clear expositor,” Rose said. “The issue with her can be that she explains something at such great length that you’re bored silly.”
Yellen returned to the Fed in 1994, after being nominated to the board by then-president Bill Clinton. 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, recalled fellow board member Susan Phillips.
“It’s a demonstration of how careful she was,” said Phillips, now a professor emeritus at George Washington University in Washington. “She listened to what other people had to say and went through editing her comments to reflect and respond to it.”
Belying her later reputation as a dove, Yellen arrived at the Fed in the midst of a credit-tightening cycle and supported repeated interest-rate increases. About four months into her term, Rose said she joked that she was the most hawkish Fed governor in history, based on the amount of tightening she had backed in the short time she’d served.
Yellen again showed a willingness to tighten credit in 1996 when she and Meyer privately urged then-Chairman Alan Greenspan to boost rates, according to the Macroeconomic Advisers director. Greenspan demurred, putting off an eventual 0.25 percentage-point increase in the benchmark rate to March the following year, a month after Yellen left the central bank.
Following a spell as chairman of Clinton’s Council of Economic Advisers and another round of teaching at Berkeley, Yellen came back to the Fed in 2004, this time as president of the San Francisco district bank.
While there, she “pioneered a multidisciplinary approach to banking supervision” that brought together economists and supervisors and was adopted by the Fed board in Washington during the crisis, according to Stephen Hoffman, who worked with her at the time and is now a managing director at Promontory Financial Group in Washington.
She also was quicker than many of her colleagues to recognize the danger posed by the housing market, telling the FOMC in mid-2007 that it was the “600-pound gorilla in the room,” according to meeting transcripts released by the Fed.
“The risk for further significant deterioration in the housing market, with house prices falling and mortgage delinquencies rising further, causes me appreciable angst,” she said, six months before the U.S. fell into recession.
As head of the San Francisco Fed, Yellen wasn’t at the forefront of efforts to contain the housing-led financial crisis that broke out the following year: Bernanke depended on a few key advisers in Washington and New York to do that. She was involved in plotting the monetary response to the turmoil as a member of the FOMC.
Since becoming vice chairman in 2010, Yellen has spearheaded an effort to improve the Fed’s communications with investors and the general public. As head of an FOMC subcommittee, she helped unite the sometimes fractious policy makers in support of greater openness and transparency.
She also has been influential in prodding the committee into adopting an increasingly expansionary monetary policy, from initiating a third round of quantitative easing late last year to firming up a promise to keep interest rates near zero.
“Janet was a force -- perhaps ‘the’ force -- behind the FOMC’s decision to move to an even more accommodative policy last December,” Meyer said. Now she must shift from being a leader of the dovish “opposition” inside the central bank to becoming chairman of the FOMC, he added.
Yellen’s calendars, obtained under the Freedom of Information Act, show more than 90 meetings by phone or in person with Fed district bank presidents in 2011 and 2012, when she visited the Boston, New York, Philadelphia, Atlanta, Cleveland, Chicago, Minneapolis and San Francisco.
“Janet is quietly but dauntingly persuasive,” Rose said. That “is pretty important on the FOMC these days,” as policy makers try to keep the expansion going while looking ahead to rolling back their economic stimulus.
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