An Inflation Dove Rises at the Fed

Back in 1994, as the most junior Federal Reserve governor, Janet L. Yellen was the last to speak when Fed officials made their weekly presentations to the board about the economy. "Somehow we'd go around the table and then get to Janet and she would find a key issue in the briefing that others hadn't seen," says Donald Kohn, then a Fed official who was later vice-chairman of the board. Yellen went on to serve as President Bill Clinton's chief economist and as President of the San Francisco Fed. In October she succeeded Kohn as vice- chairman of the board at a time when the Fed is under fierce political attack— and as divided as it's been in decades.

With commodity prices leaping higher, critics inside and outside the Fed have accused it of risking an outbreak of inflation by embarking on a plan to buy $600 billion of Treasury securities, a strategy Yellen strongly supports. On Capitol Hill, Representative Ron Paul, author of a book titled End the Fed, now heads a House financial services subcommittee on monetary policy. The Texas Republican criticized the central bank at a Feb. 9 hearing for failing either to contain inflationary pressures or reduce unemployment.

Yellen, 64, has the unenviable task of helping Chairman Ben Bernanke calm this storm. He has assigned her to head a communications subcommittee to figure out how to give the Fed a more unified public voice despite discord among its members. He also has put her in charge of a new group of economists and other Fed officials who will try to spot signs of a financial crisis before it occurs. "I've developed a deep and abiding respect for her judgment and skill as a policy maker," says the Fed chief.

The expected retirement of Kansas City Fed President Thomas M. Hoenig later this year will leave Yellen the only central bank member who was making policy during the last two times the Fed embarked on a credit-tightening cycle, in 1994 and 2004. That will give her opinion added heft in debates as the Fed weighs when to begin withdrawing the money it has pumped into the economy.

Yellen was born in Brooklyn, graduated from Brown University in 1967, and earned a doctorate in economics from Yale in 1971. She met her husband, Nobel prize-winning economist George Akerlof, at a lunch at the Fed in 1977 when she was a central bank official and he was a visiting fellow. Yellen spent most of her career teaching at Berkeley and researching labor markets. She and Akerlof have written papers on unemployment, wages, street gangs, and out-of-wedlock births.

Yellen says she went into economics because it provides a logical way to grapple with questions affecting human welfare. "I was of a generation that still was affected by the Great Depression," she says. "I didn't live through it, but my parents grew up during it." She has a reputation as one of the Fed's more dovish policy makers due to her concern about unemployment. She's a "fierce advocate" of the Fed's dual mandate to promote price stability and full employment, says Laurence H. Meyer, who served on the Fed board with Yellen in 1996 and 1997. Some Republicans believe the Fed should focus only on inflation.

Yellen says she feels "very comfortable" working at Bernanke's right hand; "my policy views I believe are very close to his." Former Fed Vice-Chairman Alan S. Blinder says he can imagine them disagreeing if Bernanke wants to raise rates to cap inflation at a time when unemployment is still high. For now, Blinder adds, that's not an issue, since Bernanke thinks inflation is too low.

Yellen's first challenge will be to sort out the communication issues bedeviling the Fed. "She is concerned about the cacophony of multiple voices seemingly contradicting one another," says Blinder, her co-author on a book about the economy in the 1990s. Yellen puts it more diplomatically. "Participants in the [Federal Open Market Committee] have a right to express their own views," she says. "We need to make sure, though, that the central message of what policy is comes across in a way that's not completely confusing." Although Yellen declined to give details, Fed officials have talked about holding press conferences for Bernanke at least four times a year after FOMC members update their economic forecasts, and issuing longer statements after policy meetings.

Philadelphia Fed President Charles I. Plosser says he would be concerned if the Fed adopted a communications strategy that stifled dissent. He says a public airing of the Fed's differences gives the country a truer picture of what's going on at the central bank. Plosser, who says he likes Yellen, will probably be on the other side of the debate when it comes to timing the next rate hike. He puts more emphasis on economic growth in assessing price pressures in the economy. The faster the economy grows, the bigger the risk of higher inflation and the greater the need to increase interest rates. Yellen focuses on slack, particularly in the unemployment rate. So if the economy is growing briskly but joblessness is still high, an inflation outbreak is unlikely.

Yellen says a lesson of 1994 and 2004 is that the Fed can't wait for unemployment to fall back to where it was before withdrawing stimulus from the economy. "You may have to take steps when it's not 100 percent popular to do so, to begin removing monetary accommodation when you don't judge the economy to be back at full employment," she says. "We know policy operates with a lag, and we have to make sure we act in a timely way." Yet Yellen seems in no hurry for the Fed to start tightening the monetary screws. "We want to be patient here," she adds. "We don't want to get ahead of where we should be."

The bottom line: Janet Yellen, the Fed board's most prominent dove, wants the central bank to send a clear message at a time of internal dissent.

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