March 12, 2010 / 10:37 PM / 9 years ago

Fed's Yellen more complex than dove label implies

BOSTON (Reuters) - Janet Yellen, eyed by President Barack Obama for the number two post at the Federal Reserve, is a more nuanced thinker than her short-hand label of “policy dove” would suggest.

Yellen, 63, would replace Donald Kohn as Ben Bernanke’s deputy if Obama goes forward with the choice and the Senate approves. Kohn will retire from the Fed on June 23.

The veteran public servant is currently president of the San Francisco Federal Reserve Bank. She served as a Fed board governor from 1994 to 1997, and chaired the White House Council of Economic Advisors under Bill Clinton from 1997 to 1999.

Yellen’s name is inevitably mentioned among the Fed’s most dovish members, or those more likely to favour lower interest rates to support economic growth and boost labour markets.

In her most recent speech in February, she called inflation “undesirably low” and said economic growth would be sluggish for several years — making clear she believes the time for tightening monetary policy is a long way off.

“If it were possible to take interest rates into negative territory, I would be voting for that,” she told reporters.

“We rank her as the most dovish FOMC member,” Dean Maki, chief U.S. economist at Barclay’s Capital, said in a research note. “Her appointment would tilt the (Fed’s policy) committee in a more dovish direction, which could potentially affect the timing and pace of policy tightening.”

While the San Francisco Fed president votes on interest rate policy only one year in three — Yellen voted in 2009 and in 2006 — a Fed board seat would give her a vote at every meeting and presumably a louder voice on policy, particularly with the No. 2 label.

Indeed, news of her potential selection weighed on the dollar as traders bet greater influence for Yellen would strengthen the conviction the Fed will be in no rush to start raising interest rates.

Adam Cole, global head of FX strategy at RBC Capital Markets, termed Yellen “an arch-dove.”


Still, Yellen has regularly made a point of expressing unease with high inflation and her view that Fed policy errors have been a factor in creating it.

In July 2009, she told reporters the high inflation of the 1970s was partly the result of monetary policy blunders that will not be repeated by the current Fed.

The damaging stagflation associated with that era — high inflation combined with slow economic growth — was a formative experience for her, Yellen said.

She made a similar comment in May 2008. “I don’t think this is the ‘70s, but we can’t let it get to the ‘70s ... our behaviour is critical to that,” Yellen said.

Yellen replaced Robert Parry at the San Francisco Fed in June 2004. In her stints on the voting rotation since then she never voted in dissent, either when the Fed was raising rates in early 2006 or when it left its benchmark federal funds rate at a rock-bottom zero to 0.25 percent range during 2009.

In fact, in her two stints at the Fed, Yellen has voted 36 times with no dissents.


Yellen over time has been prepared to adapt her views.

She warmed to the idea of a soft inflation target being set by the Fed — albeit one that would not weaken the central bank’s commitment to full employment, the second half of the Fed’s dual mandate.

In the past Yellen supported an inflation rate of between 1 percent and 2 percent. But after the recent threat of deflation she has termed a 2 percent rate “an appropriate long-term price stability objective.”

Yellen also tempered her views on how the Fed should deal with asset bubbles. In 2007 she said the Fed typically should not target bubbles with monetary policy. By April 2009, the sting of the Great Recession had been felt.

“Episodes of exuberance, like the ones that led to our bond and house price bubbles, can be time bombs that cause catastrophic damage to the economy when they explode,” Yellen said. Like many Fed officials, Yellen is thinking long and hard about how best to deal with asset exuberance.

Yellen veered far from monetary policy, but into one of her favourite research areas, in a lecture entitled “Economic inequality in the United States,” at the University of California Irvine in November 2006.

She noted that much of the gains from three decades of U.S. economic strength had “gone to just a small segment of the population — those already in the upper part of the distribution.”

“Inequality has risen to the point that it seems to me worthwhile for the U.S. to seriously consider taking the risk of making our economy more rewarding for more of the people,” she concluded.

The Brooklyn-born Yellen graduated from Brown University in 1967 and received her PhD in economics from Yale in 1971. She then taught at Harvard and the London School of Economics.

Since 1980, between stints in Washington and at the San Francisco Fed, she has taught macro-economics and conducted research at the University of California, Berkeley. She twice won the outstanding teaching award at Berkeley’s Haas School of Business.

She has published numerous papers with her husband, Nobel prize-winning economist George Akerlof.

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