News Column

Yellen Will Face Greatest Challenge on Day One

October 10, 2013

Dominic Rushe and Heidi Moore, Guardian

janet yellen
Janet Yellen (file photo)

Every year the US business magazine Forbes prepares a list of the world's most powerful women. Next year all but one - Angela Merkel, the German chancellor, who heads the list - will probably be moving down a place. Coming straight in as the world's second most powerful woman will be Janet Yellen, an academic economist and expert on unemployment, who was last night nominated as the next chairman of the US Federal Reserve.

Yellen will be the first woman to head America's central bank in its 100-year history, and her appointment - which has to be ratified by the Senate - comes at a critical time because the moves the Fed will have to make in the coming months and years will reverberate through economies around the world.

She is the polar opposite of the new head of the Bank of England. While Mark Carney worked for Goldman Sachs and is dubbed the rock star of central bankers, Yellen - almost 20 years his senior at 67 - is a self-effacing academic who has spent much of her career working behind the scenes at the Fed and teaching. Her idea of fun is stamp collecting and hosting dinner parties.

Yellen's nomination yesterday sent a clear signal to the financial markets that the central bank will maintain its aggressive stimulus programme, designed to prop up the world's biggest economy.

Barack Obama introduced Yellen at the White House, describing her nomination as "one of the most important economic decisions that I'll make as president". He said Yellen was "a proven leader and she's tough", adding that she had sounded the alarm bell early about the housing market bubble and market excesses before the crash.

Yellen said she was "honoured and humbled" by the appointment. "While I think we will agree that more needs to be done to help those hardest hit by the recession, we have made progress," she said. However, she added: "Many Americans still can't find a job and worry that they can't pay their bills."

US stocks rallied early yesterday, albeit briefly, but the markets have suffered two days of falls as investors grow nervous about the impact of the political row over the country's debt ceiling.

"The president could not have found a better qualified candidate for this historic nomination," said Sheila Bair, the former chair of the US bank regulator. "Throughout her career, Janet Yellen has demonstrated a real commitment to public service, and sincere desire for a stable financial system which fulfils the needs of the real economy."

Yellen's crucial problem will be when and how to turn off the flood of cheap money the Fed has been pouring into the US economy - at a rate of $85bn a month - to kickstart recovery. When the current chairman, Ben Bernanke, even suggested he might be ready to start winding down the programme in May, markets from South America to southern Asia reacted violently.

Yellen has been known as a staunch supporter of Bernanke's medicine: "The biggest thing it does is represent continuity in terms of the policies that the Fed has had in place for a while," said Karim Basta, director of economic research and chief investment strategist at the hedge fund III Associates. "She was the architect of those."

Yellen is currently Bernanke's No 2 and spearheaded many of the policies that have characterised his more open approach to communication. She encouraged the Fed to set specific targets for inflation and unemployment, to hold more press conferences to explain their actions, and to publish the forecasts of each voting member of its board of governors. Wall Street Journal analysis shows that time and again, her forecasts were the most accurate.

She was not Obama's first choice for the job. She won the nomination after a long and unusually public battle that pitched her against one of the president's key advisers, former Treasury secretary Larry Summers. Summers withdrew as it became clear he would face serious opposition from Obama's own party, from senators worried about the former Clinton adviser's history of helping to deregulate financial markets.

While Summers faced opposition from the left, Yellen, a Democrat, is facing opposition from rightwing senators concerned by her backing for Bernanke's quantitative easing programme, which they believe undermines the dollar and risks unleashing inflation.

Even within the White House it is unclear how much support Yellen has. Obama aides appear to have been briefing against her in the run up to the nomination, describing her as methodical, meticulous and somewhat distant. She was not a "team player," anonymous sources suggested to media outlets.

But if anyone is prepared for a fight, it's the diminutive Yellen. "Janet is very tough - tough in her views and tough in her independence," Laura D'Andrea Tyson, a friend and former Clinton administration official told USA Today.

Yellen's career in economics began at Brown university, in Rhode Island, in 1963. She graduated from there with top honours in 1967. A Fed insider since 1977, when she was an economist with the board of governors, Yellen has consistently shown she is prepared to speak her mind. Compared to her somewhat gnomic boss, she is a model of clarity.

Before the housing crash, when Bernanke was dismissing signs of a price bubble and Yellen was San Francisco Fed president, she warned fellow policymakers there was "a 600-pound gorilla in the room, and that is the housing sector". She said the risk of a crash and vast numbers losing their homes was causing her "appreciable angst."

But Yellen has acknowledged that she did little to rein in the 600-pound gorilla. The San Francisco Fed oversaw the mortgage lender Countrywide Financial, once the largest subprime home loan lender in the US. Yellen admitted to a Congressional commission investigating the financial crisis in 2010 that the Fed did not do enough to halt its excesses. The rulebook to curb excessive risk-taking by banks was inadequate, she told the congressmen. "You could take this, rip it up, and throw it in the garbage can."

Much of Yellen's academic research - often carried out with her husband, a fellow Berkeley economics professor George Akerlof, who is a Nobel prize winner - has focused on the costs and causes of unemployment. "These are not just statistics to me. We know that long-term unemployment is devastating to workers and their families," she said in a speech to a trade union in February.

Yellen has also analysed single motherhood, denying it is a result of welfare payments and blaming it on a decline in shotgun weddings.

The economics gene has been passed to Yellen and Akerlof's son. Robert Akerlof teaches economics at Warwick University. He may well have picked up the basics at mealtimes - his mother joked in 1995 that dinner at her house meant "a diet that is richer in discussions of economics and policy issues than many people would find appetising".

(c) 2013 Guardian Newspapers Limited.

Original headline: The Guardian profile: Janet Yellen: World's second most powerful woman faces her biggest decision on day one

Source: (c) 2013 Guardian Newspapers Limited.

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