This Economist Says Yellen Isn’t ‘Too On Board the Stimulus Train’
President Obama on Wednesday nominated Janet Yellen, whom he called “one of the nation’s foremost economists and policy makers,” to lead the Federal Reserve system, replacing Ben Bernanke. In elevating Yellen from her current position as vice chair of the Fed, she will become the first woman to lead the central bank and joins the president as an independent co-steward of the American economy.
“Given the urgent economic challenges facing our nation, I urge the Senate to confirm Janet without delay,” Obama said, drawing attention to the only roadblock to her nomination: Senate approval. “I’m absolutely confident that she will be an exceptional chair of the Federal Reserve.”
Greg Mankiw — chairman of the Council of Economic Affairs from 2003 to 2005, during the administration of former President George W. Bush — agrees. When asked on Bloomberg Television’s “Market Makers” whether the criticism that Yellen is “too on board the stimulus train” is accurate and if “she [is] the right choice for the top job at the Federal Reserve,” he responded with enthusiasm.
“I think she is a great choice,” Mankiw said. “I’m not a great fan of a lot of President Obama’s decisions, but this one I’m a fan of. Janet is a very smart economist. She’s very much mainstream, lots of Central Bank experience, and most important, she is a consensus builder. She’s not going to go her own way. She will look to her committee; she’s going to look to her staff and try to find a point of view a lot of people can sign onto. That’s good thing.”
The White House also called Yellen a consensus builder. “In her time in the Federal Reserve System she has been known for her sound judgment and ability to build consensus,” said a memo sent to Democrats on Wednesday morning. “Colleagues across the spectrum have praised her and expressed admiration for her abilities and qualifications even when they don’t agree with her — including conservative economists like Greg Mankiw, Glenn Hubbard and Martin Feldstein.”
Part of the reason Yellen is described as “mainstream” is that her policymaking and her behavior are seen as similar to Bernanke. “I think they’re quite close,” Mankiw commented on Bloomberg Television. “She might be a little more dovish instinctually then Ben Bernanke is, but Ben has been quite aggressive on things like quantitative easing. Janet has been on board with that and maybe should have done more in terms of forward guidance, but she is basically very similar and they come from a similar intellectual tradition: mainstream monetary economics. There is nothing crazy coming out of a Yellen Fed.”
Because Yellen served as vice chair to Bernanke, it will hopefully be as a seamless a transition as possible, thereby allowing policy to remain consistent.
Yellen is considered by many to be something of an inflation dove. This means that she is generally more comfortable with low interest rate policies and is less troubled by spurts of relatively high inflation than so-called inflation hawks. This position is consistent with the Fed’s highly accommodative monetary stance, which was championed by Bernanke, who is also a dove.
With this in mind, most observers expect her to be in no rush to curb asset purchases and raise the federal funds rate, instead preferring to encourage growth. Yellen’s position is perhaps most infamously captured by this statement she made during a policy meeting held by then-Fed Chair Alan Greenspan. Yellen argued against inflation targeting as a policy tool:
“Fortunately, the goals of price stability and output stability are often in harmony, but when the goals conflict and it comes to calling for tough tradeoffs, to me, a wise and humane policy is occasionally to let inflation rise even when inflation is running above target. … When I look at the behavior of the FOMC and other central banks, I simply can’t find a lot of cases in which monetary policy has ever been driven by an exclusive focus on inflation performance.”
Because inflation has not been a problem recently, the Fed has been more focused on the employment side of the central bank’s dual mandate. For some, including Mankiw, Yellen’s stance on inflation and her tendency to focus too much on labor statistics are a small concern. “The question is when things change, whether she will change appropriately. That’s a big question,” he told Bloomberg Television. “I see no reason to think she wouldn’t change. She has been committed to the [Fed’s] 2 percent inflation target and hasn’t been open to suggestion that inflation should rise above that. I expect her to be true to her word, and when inflation looks like it’s going to be a problem, she will respond accordingly.”
Little is known about Yellen’s views on financial regulation, as Mankiw noted in his interview, but he believes that she will develop those views later. “One suspects Janet will have a more skeptical view toward financial institutions than others might,” he said.
Follow Meghan on Twitter @MFoley_WSCS