After months of indecision and the flotation—and puncturing—of a Larry Summers trial balloon, President Obama is set to nominate Janet Yellen to be the next chair of the Federal Reserve.
The fact that Yellen,the current vice chair of the nation’s central bank, is a woman isn’t the most remarkable historical fact about her impending appointment. Of course, that is remarkable. For the first time in their careers, the heads of Wall Street’s investment banks and hedge funds will, in effect, be reporting to a woman as their boss. No, the remarkable fact is this: for the first time in a generation, an actual Democrat will be in charge of monetary policy.
At the presidential level, we seem to be in an age of Democratic dominance. Democrats have won the popular vote in five of the last six presidential elections, and seem to hold a structural advantage given the nation’s changing demographics. Democrats have sat in the White House for the 13 of the last 21 years. And yet, when President Clinton and President Obama had the opportunity to name a head of the Federal Reserve, they chose to leave in place the man appointed by their Republican predecessors. Clinton reappointed Reagan appointee Alan Greenspan twice (in 1996 and 2000), and Obama reappointed Bush appointee Ben Bernanke in 2010.
They did so for a couple of reasons. First, the markets like continuity, and dislike abrupt changes. Greenspan was presiding over a broad expansion when he was reappointed. Bernanke was nursing the traumatized economy through a halting recovery when he was re-upped. Also, as is often the case with Pentagon appointments, there’s a presumption (wrong, it turns out) that lifelong Democrats aren’t cut out for the job. To compensate for the party’s perceived historic weakness in a policy area, Democratic presidents have occasionally felt the need to appease the markets, CEOs, and business by installing people in the position who don’t always share their political and economic views.
This is not to say that Bernanke has been working at odds with the Obama administration. Far from it. In fact, the mild-mannered Bernanke has proven to be quite aggressive in using unorthodox tools to spur the economy as it recovered from the financial crisis and has labored under Republican attempts to impose austerity and generally sandbag economic growth. In the absence of any fiscal stimulus (and in the presence of a very large fiscal anti-stimulus), Bernanke has been furiously creating new money to purchase bonds in an effort to keep interest rates low and spur growth. For his sins—the quantitative easing efforts that are continuing—the lifelong Republican has become a hate object among large sections of the GOP base.
In that regard, Yellen, 67, won’t represent much of a departure from Bernanke. But she will bring another dimension to the role, which has nothing to do with her gender. The Federal Reserve famously has a dual mandate. It is supposed to fight inflation while promoting full employment. In recent years, it has done a fabulous job of the first. Despite the carpings you’ll hear from economically illiterate right-wingers, inflation has been, and remains, remarkably muted. On the second, by its own measure, the Fed has fallen down on the job. The official unemployment rate remains at 7.3 percent, while a broader measure of underemployment, which takes into account part-time workers and people who have dropped out of the labor force, stands at 13.7 percent.
While Bernanke wasn’t exactly indifferent to the poor labor situation, it didn’t appear to keep him up at night. He didn’t use his bully pulpit to urge Congress (or the White House, for that matter) to do much about it. And earlier this year, his Federal Reserve indicated that it would start reducing the amount of its support for the economy even as unemployment remained quite high.
As vice chairman of the Fed, Yellen was part of the Bernanke regime. So analysts expect, correctly, that her appointment represents continuity, not a sharp change. This isn’t like swapping in Hillary Clinton for Condi Rice. But she has written a great deal about the labor market. She worked in the Clinton White House. She’s taught at the University of California at Berkeley. The perception (the hope for the left, the fear for the right) is that she will be much more concerned with promoting full employment and somewhat less concerned with fighting inflation than her predecessor. Given where the economy is today—very little inflation, too little job growth—that is in fact the correct attitude. What’s more, with Congress intentionally sandbagging the economy and threatening a debt default, the onus falls even more on the Fed to support growth. And so analysts tend to believe that a Yellen Federal Reserve will be slow to raise interest rates and swift to goose the economy. In other words, a Yellen Fed may tolerate a little inflation if that’s what it takes to put more people back to work.
That’s why markets are reacting this morning as they are. Republican Senators are likely to fill the confirmation hearings with lots of pap about how the current monetary policy has been a disaster for the economy and the markets. But professional investors know that Bernanke’s stimulative efforts have generally been positive. The Fed’s perpetual buying of bonds has kept interest rates low. By supporting growth and keeping interest rates low, the Fed is also making stocks more appealing. Stock futures and the dollar were generally up Wednesday morning.
The Yellen appointment means we’ll be in for a lot of explicit and implicit sexist comments from Wall Street about the new head of the central bank. But so far, investors seem to be relieved that a woman will be calling the shots.