Janet L. Yellen at a crucial point in Fed’s future


WASHINGTON — Two momentous decisions involving the Federal Reserve are coming to a head, with significant implications for the U.S. and global economies.

Janet L. Yellen, a former UC Berkeley economist, stands in the middle of both of them.

As vice chair of the central bank, Yellen will take a leading role next week, when policymakers decide whether to start rolling back the Fed’s massive monetary stimulus after several years of providing extraordinary support for the weak economy.

The prospect of an imminent policy shift by the Fed has already shaken financial markets from Brazil to India, marking the end of an era of super-low interest rates.


Soon after, President Obama is expected to nominate his selection to succeed Chairman Ben S. Bernanke, whose term expires at the end of January.

Yellen is one of two leading candidates for that increasingly powerful position, and her views on the economy and financial regulations have become the subject of intense interest among economists, investors and policymakers around the world.

“The interest is more outsized than normal because we’re still in very unusual times,” said Mark Zandi, chief economist at Moody’s Analytics, referring to high unemployment as well as the unprecedented intervention by the Fed.

“The next Fed chair is going to have to unwind all of these extraordinary steps taken to fight the [financial] crisis,” he said.

In what has been a highly public campaign for Fed chairman, critics have portrayed Yellen as being softer on controlling inflation than her chief rival for the nomination, former Treasury Secretary Lawrence H. Summers.

That has added to an overall perception that Yellen — a soft-spoken, diminutive woman — may be too soft in general to lead the world’s most influential central bank, a criticism that some say reflects a gender bias. But those who know Yellen say that the former president of the Federal Reserve Bank of San Francisco is hardly a shrinking violet.


Back in 1995, a few months after Yellen joined the Fed board, they note, she wasn’t afraid to take on then-legendary Chairman Alan Greenspan.

Concerned that consumers were being misled about interest rates on bank deposits, Yellen successfully urged her fellow policymakers to amend a Fed regulation despite opposition from Greenspan. The 4-3 vote was one of only two he lost in more than 18 years leading the Fed.

“That took a lot of gumption because Greenspan was a god-like figure,” said Alan Blinder, who was a Fed governor at the time and worked with Yellen to pass the amendment. “You were risking the disapproval of the rest of the board if you defied Greenspan.”

Blinder is one of more than 300 economists who in an open letter this week urged Obama to name Yellen. A Yellen nomination would be historic: She would be the first woman to lead the 100-year-old Fed.

For now, most expect Summers to get the nomination. Summers was Obama’s top economic advisor in 2009-10 and has a closer relationship with the president than Yellen does.

He is known as a brilliant economist with first-hand experience dealing with financial crises on a global scale. The knock against Summers is that he has a reputation as being difficult to work with, and he is likely to face considerable opposition in the Senate, where he would need to win confirmation.


The person who replaces Bernanke will have to guide the Fed as it tries to withdraw its monetary stimulus without damaging the sluggish recovery from the Great Recession.

The first step in that process could come next week, when Fed policymakers are expected to make a small cut to their $85-billion monthly purchase of bonds, a program that has helped to lower long-term interest rates and boost growth.

Yellen’s backers said she would provide thoughtful leadership and consistency at an institution that has worked to become more collegial and transparent under Bernanke.

“Her knowledge of how the Fed sets policy, her understanding of the relationship between monetary policy and economic growth and her ability to see and propose solutions to emerging economic problems is second to none,” the economists said in the letter to Obama.

She has been a strong proponent of stricter regulation, raising early concerns about the risk that banks were taking as the housing bubble inflated, though she did not foresee how badly it could damage the economy.

Yellen was “cool, professional and no-nonsense” in helping to handle a number of West Coast bank failures during the crisis, said Sheila Bair, former chair of the Federal Deposit Insurance Corp., who is publicly backing Yellen.


Yet in financial circles, Yellen is regarded as being a little too eager to let inflation rise in her efforts to reduce unemployment. That perception has hurt her standing with bond traders, who not only pay close attention to inflation but also have had considerable sway over Washington policymakers.

But after reviewing 42 of Yellen’s public speeches over the last five years, Stephen Oliner, senior fellow at the UCLA Ziman Center for Real Estate, concluded that the notion she is too soft on inflation is “a canard.”

Yellen very closely adheres to the Fed’s tough line on inflation. Most economists say her views are in line with Bernanke’s on balancing the need to keep price growth low with the Fed’s other mandate to maximize employment.

In an April 2011 speech, for instance, Yellen said that Fed policymakers are “determined to ensure that we never again repeat the experience of the late 1960s and 1970s, when the Federal Reserve did not respond forcefully enough to rising inflation.”

From her earliest days, Yellen has been a proponent of the Keynesian view that deficit-spending and easy-money policies could pull the economy out of a recession. But those who know her said that, like other mainstream economists, she also was influenced by the nation’s double-digit inflation debacle in the 1970s.

Her current tilt toward a greater focus on employment than inflation merely reflects the situation.


“With the human cost of unemployment being so high and affecting so many people,” she and others “put a little more weight on unemployment,” Georgetown University economist Harry Holzer said of Fed policymakers

Yellen is generally considered tougher on oversight of financial institutions than Summers, who was a key player in the deregulatory push of the Clinton administration in the late 1990s — a push that many believed helped open the door to the financial crisis.

Yellen started warning in 2005 of the risks of soaring home prices, though initially did not think a bursting housing bubble would have “an exceedingly large effect” on the economy.

Still, Yellen has been criticized for presiding over the San Francisco Fed when the subprime housing market was booming.

She told the Financial Crisis Inquiry Commission in 2010 that she tried to push regulators in Washington to issue stronger guidelines that would allow bank examiners to be tougher on risky bank lending practices.

“I felt when this guidance came out you could take this and rip it up and throw it in the garbage can,” Yellen told the commission. “It wasn’t a tool that was of any use to us in controlling this risk.”


Stephen M. Hoffman, who was in charge of bank supervision at the San Francisco Fed under Yellen, said she always has believed in strong regulatory oversight.

“The whole crisis fortified what was already her view,” he said. “She also realizes you can overdo it, too. But she’s a big believer that banks have special responsibilities, given the public support they have for what they do, and the government has to play a role there.”