How would Janet Yellen balance jobs, inflation as Fed chief?


WASHINGTON — Janet Yellen, President Obama’s choice to head the Federal Reserve, comes to the post with more experience at the central bank than her predecessors and a career-long focus on the issue that remains at the center of public concern over the economy — jobs and labor markets.

Yellen’s emphasis on work and unemployment, on which she produced several major scholarly papers during her many years as a Berkeley professor, has also become the focus of Republican critics and some on Wall Street who fear she is soft on inflation.

The Fed has a dual mandate to maintain stable prices and optimize employment, and some experts have seen the central bank as being too willing to tolerate inflation in order to lower unemployment levels.


Last month Fed officials shocked investors and most everybody else by holding off on reducing their main stimulus program, worried that the economy and the job market in particular were still too weak. They were also concerned about the uncertain budget outlook and the threat of political gridlock, worries that proved prescient with the current standoff in Washington that has caused a partial shutdown of the government and raised serious risks of a U.S. default.

Minutes of last month’s meeting, released Wednesday, indicated that it was a “relatively close call” for several voting members of the Fed policymaking committee on whether to begin to cut back its bond-buying program. Officials worried that failing to reduce the stimulus could undermine the central bank’s credibility as financial markets were expecting a pullback.

Most Fed officials, though, said they still expected to see the central bank starting to cut bond purchases by year’s end.

At a deeper level, the split at the Fed reflects the partisan struggle in Washington as well as divisions in the public at large.

In recent years, conservatives increasingly have pushed back against the nation’s spending and debt and what they see as the threat of runaway inflation and other problems stemming from government policies. Aggressive monetary support by the Fed has been among the policies some conservatives have attacked.

For now, Fed critics have been largely quieted because inflation is very low and shows few signs of rapidly increasing in the foreseeable future. By contrast, unemployment remains high after four years of recovery. That has bolstered the Fed’s focus on maintaining stimulative policies to promote employment. Yellen, the vice chair, has been one of the strongest proponents of this approach.

During the recession and tepid recovery, the Fed, under the leadership of Chairman Ben S. Bernanke, has continually pumped money into the financial system while keeping its benchmark short-term interest rate near zero. Yellen has been a close ally of Bernanke, and if anything, probably has pushed for even stronger stimulus.

Yellen’s critics have often cited as evidence of her position a statement she made in early April: “I believe progress on reducing unemployment should take center stage” for Fed policymakers “even if maintaining that progress might result in inflation slightly and temporarily exceeding 2%” — the Fed’s target rate.

But many economists say Yellen’s other public remarks, long experience at the Fed and record suggest she is nothing like the inflation dove the critics portray. After reading 42 of Yellen’s public speeches, Stephen Oliner of UCLA concluded that she very closely toed the Fed’s traditional tough line on inflation.

“Now is not the time” to be worrying as much about inflation as unemployment, said Georgetown professor Harry Holzer, espousing the mainstream economists’ view of the current situation.

“I was in the Clinton administration with her when unemployment was 4%, and she was very aware of inflation,” Holzer said, referring to 1999 when he was the Labor Department’s chief economist and Yellen headed the White House Council of Economic Advisers. “She’s not a mindless stimulator.”

At the same time, Holzer said one of Yellen’s challenges, if she is confirmed as expected, would be to deal with the reputation in some circles that she is a dove. “At some point, I hope she rebuilds her credibility with bond investors and inflation hawks,” he said.

Diminutive and soft-spoken, Yellen grew up in Brooklyn and attended a public high school in the city. She developed a passion for economics and international finance in particular while an undergraduate at Brown University, she told the college newspaper recently.

Her economic views were largely formed at Yale University, where she earned a doctorate under the tutelage of the late Nobel laureate James Tobin — a strong proponent of the ideas of John Maynard Keynes that government can and should take action to mitigate recessions and tackle problems such as high unemployment.

Among Yellen’s scholarly works are a number of papers on work, labor movement and the economy that she wrote while at Berkeley with her husband, George Akerlof, who won the Nobel prize in economics in 2001.

Their work laid out a theory, now widely accepted among economists, about why many firms tend not to cut wages during periods of high unemployment — their desire to maintain the productivity of their workers trumps the short-term benefit that lower wages might bring. The “stickiness” of wages, in turn, helps explain why unemployment can persist and why government intervention in the market can help lessen it.

In a paper published in 1990, Yellen and Akerlof explained upward job mobility and the patterns of unemployment by skill as an economy recovers from a downturn. Such concerns are as relevant today as ever. And as a top Fed official, Yellen has emphasized in recent years the devastating and prolonged effects of the recession on workers — and the need for the central bank to take aggressive action to combat the high jobless rate.

In that vein, Yellen doesn’t regard her many years teaching at Berkeley as something apart from the real-life problems of the economy. “Business students are very oriented to playing a role in the real world and accomplishing something, not training themselves to be scholars and contribute to the literature,” she told the alumni magazine of Berkeley’s Haas School of Business last year. “Teaching in that kind of environment has focused me much more on the real world, how pieces of the theory I know can be applied to real-world situations.”

Over the years, she has maintained her interest in the labor market as she moved back and forth between academia and policymaking. She started at the Fed as a staff economist in 1977, before leaving to teach at the London School of Economics and then for 14 years at Berkeley. She left in 1994 to be a Fed governor and then stayed on in Washington in the Clinton White House. Back in Berkeley for a few years, she rejoined the Federal Reserve System in 2004 as the president of the Federal Reserve Bank of San Francisco and for the last three years has been the Fed’s vice chair.

As the No. 2 under Bernanke, Yellen has been a driving force behind efforts he has made to increase the Fed’s transparency and communications with the public. Largely under Yellen’s direction, the central bank has pushed the limits in articulating its plans and goals. The Fed has, for example, laid out specific inflation targets and unemployment thresholds for policy changes in hopes of giving markets and other people a clearer sense of where its policies are headed.

Her ability to communicate her ideas will no doubt be tested as Fed chair. Her intellectual flexibility will help, said James Wilcox, a professor at Berkeley, who has known Yellen since she joined the faculty in 1980.

“Even when we disagreed a lot, and very vigorously, I always felt if I had the better evidence or line of argument, I always felt I could persuade her,” said Wilcox, recalling many discussions with Yellen over Szechuan shrimp and rice at a hole-in-the-wall Chinese restaurant near the Haas School.

“She really knows a lot of economics, but she’s intellectually flexible,” he said. “She’s not doctrinaire.”