A changing of the guard is at hand for the top position at the Federal Reserve, with Vice-Chair Janet Yellen’s nomination poised to be approved by Congress perhaps as early as next week. No major policy changes are likely at first, but the course of monetary policy could shift dramatically within a few years.
Ms. Yellen would be the 15th Fed chief, and the first woman in the corner office in the central bank’s history. Given that the Federal Reserve is celebrating its 100th anniversary, the top job is held for an average of about seven years. Outgoing Chairman Ben S. Bernanke held on to the position for eight years, a normal tenure.
Ms. Yellen is certain to undergo further scrutiny prior to her assumed approval, in view of the critical nature of the job and the likelihood that the person holding it will be in office for a number of years. Janet Yellen certainly possesses all the experience anyone could ask of a candidate for Fed chief. In addition to a distinguished academic career, she has served in several capacities within the Federal Reserve System. Those include Economist, Member of the Board of Governors, President & CEO of the Federal Reserve Bank of San Francisco and, currently, Vice Chair of the Board of Governors. Having accumulated 15 years of experience in various positions in the Fed, there is little doubt few people know more about the inner workings of the nation’s central bank than Ms. Yellen. She also chaired the President’s Council of Economic Advisors from 1997-1999.
The top-notch pedigree notwithstanding, there could well be some opposition to Ms. Yellen’s support of the Fed’s aggressive stimulus measures following the 2008-2009 Financial Crisis during the Senate confirmation process. In particular, the "quantitative easing" program that has seen the Fed quadruple its balance sheet has stirred controversy by rousing fears of inflation. Of course, inflation, as measured by the consumer price index, has not been a problem yet. Moreover, the central bank felt compelled to act decisively as fiscal policy has proved a drag on the economy with recent government budget cutbacks.
Once in office, Ms. Yellen will have her work cut out for her in bringing the economy and interest rates back to a sense of normalcy. In her favor is the start of the tapering process with respect to the Federal Reserve’s bond-buying program. The Fed has indicated that it will purchase a combined $10 billion fewer Treasury securities and mortgage bonds per month, beginning in January. The initiative may be scaled back further as 2014 wears on, assuming the economy continues to make strides in its recovery. Once the "quantitative easing" ends, the Fed will be looking to raise short-term interest rates. But that may not occur until 2015, at the earliest. Assuming things go right, we project a Fed funds rate of around 3.5% in 2017, which would be indicative of a healthy economy. If interest rates are back to normal by 2017, presumably near the end of Ms. Yellen’s expected four-year appointment, it would very likely mark a successful term in office. And it would represent a marked difference in tone from the emergency measures still in place.
Potentially helping Ms. Yellen could be veteran central banker Stanley Fischer in the number two spot at the Fed. Mr. Fischer’s name has been bandied about as taking Janet Yellen’s place as Vice Chair, and he may be in line to be nominated by President Obama. Mr. Fischer’s extensive international experience would probably prove invaluable. But first, Ms. Yellen must get through the confirmation process.
Note: Janet Yellen was confirmed to her appointment as Fed chief on January 6th by a Senate vote of 56 to 26. She is expected to take the reins on February 1st. We wish her much success.
At the time of this article, the author did not have positions in any of the companies mentioned.