Talk about a rough first day on the job. On Monday, Janet Yellen’s first full day as Chair of the Federal Reserve, the Dow Jones Industrial Average fell more than 300 points.
The U.S. military may no longer be the world’s policeman. But the U.S. central bank is still the first-responder for the world’s financial crises. If somebody starts a fire – in Russia, or Thailand, or Mexico, or in the U.S. subprime market – the Federal Reserve has to put it out.
And, for the first time in the institution’s 100-year history, the fire chief is a woman.
Janet Yellen formally succeeded Ben Bernanke as chair of the Federal Reserve last week. (She has let it be known that she’d like to be referred to as “Chair,” rather than “Chairwoman,” even though each of her 14 predecessors has been known as “Chairman.”)
Save her gender, Yellen has a standard issue resume for a central banker: Ivy League education, prestigious tenured post (Berkeley), Clinton administration official, regional Fed bank president and, since 2012, Vice Chair of the Federal Reserve.
But Yellen, 67, is breaking new ground. Moreso than the appointment of women to other prominent political positions – the Supreme Court, Secretary of State, Attorney General – Yellen’s ascension at the Fed is likely to inspire some awkwardness. It may be 2014, but the financial sector – Wall Street, the global web of funds, central banks, individuals and institutions – is almost entirely a man’s world, and an unevolved man’s world at that. Very few of the key players have worked with a woman as their equal, let alone as their boss. Kevin Hassett, a former Fed economist and supporter of Yellen, referred to her as a “feisty lady.” Should the markets take a prolonged turn for the worse, I’d expect to hear Yellen referred to by Masters of the Universe with a five-letter word.
The cursing may begin sooner rather than later. The Fed has a dual mandate of fighting inflation while promoting maximum employment. But the markets regard the Fed as their daddy, the figure who will save participants from stupid financial decisions. Alan Greenspan, the Rand-inspired free-marketer who conflated the markets with the economy, managed interest rates in part to keep the bourses buoyant. His successor, Ben Bernanke, set interest rates at emergency low levels, and then kicked off successive bond-buying programs (quantitative easing) to stimulate the economy. So long as short-term interest rates were zero, and so long as the Fed was buying bonds to keep long-term rates low, there was no reason *not* to buy stocks.
But Yellen takes office at a moment when the Fed is asking markets to eat their vegetables instead of doling out sugary sweets. Last fall, the Fed decided to reduce some of the support it has been providing to markets – by reducing the amount of bonds it buys each month by $10 billion. At the time, it made sense. The U.S. economy, having put the government shutdown behind it, was finally growing and the labor market, while far from satisfactory, is improving. Yellen, who helped formulate the policy, now has to execute it.
The problem? In the two months since the tapering started, conditions have changed. Emerging markets chose January as a time to throw one of their not infrequent fits. China’s growth is slowing from its torrid pace. Political problems in Turkey and Argentina have created frenzy in the local currency and stock markets. And on Monday, a bunch of disappointing data points – from sluggish car sales to a poor manufacturing survey – suggested that the U.S. engine might be shifting into a lower gear.
Federal Reserve Chairs rarely get a honeymoon period. Greenspan took office in August 1987 – the stock market crashed more than 20 percent in a single day two months later. Yellen’s is likely to be even shorter. The fire alarms are already ringing.