Janet Yellen, (shout-out to this Brooklyn native) has served as the Vice-Chairwoman of the Fed over the last four years, has whispered into Bernanke’s ear more often than others and is therefore expected to largely continue the policies that have been set in place. She is generally considered to be dovish and more concerned with maximum employment than with low inflation. Her extensive experience with the Fed and academic work lend credence to the belief that she can be hawk-minded with respect to monetary policy.
Janet Yellen graduated summa cum laude from Brown with a degree in economics, and earned a Ph.D. at Yale in 1971. She was awarded the Wilbur Cross Medal from Yale in 1997, an honorary doctor of laws degree from Brown in 1998, and an honorary doctor of humane letters from Bard College in 2008.
She is professor emeritus at Berkeley, where she has served on the faculty since 1980. She previously taught at Harvard and the London School of Economics. Her initial focus at Brown wasn’t economics but philosophy. In a prophetic 1997 interview with the Brown Alumni Magazine, Yellen said she switched after taking economics courses and learning about, among other things, how the Fed’s actions impact the overall economy.
In the near-term of a Yellen chairmanship it will be important for her to establish her inflation-fighting credentials. This may be accomplished by either initiating the tapering off of QE3 or by implementing the next increment early in her tenure. In either case, financial markets may be volatile in the period it takes her to establish credibility
In the medium term she will be faced with the challenges of navigating the Fed through the uncharted waters of unwinding the unprecedented stimulus without severely raising unemployment or waking the inflation dragon. As an example of the uncertainty associated with this process we only need to go back to September when the Fed did not initiate tapering even though it was widely expected to do so. The reason cited for this inaction was that interest rates had already risen and choked off the benefits of the policy too early because markets were already incorporating the start of the taper. Conducting monetary policy will continue to require both nimbleness and innovative responses especially when she speaks to the markets, Wall Street and Main Street.
The final consideration of the likely characteristics of a Yellen chairmanship is the increased regulatory role of the Fed. Dodd-Frank and Basel III will require the Fed to more aggressively pursue regulatory supervision and enforcement. Yellen has stated that this avenue of ‘macro prudential’ policy is the more likely tool to reduce the chances for another financial meltdown. The ultimate hope is that this tool can be sharpened into automatic financial stabilizers that contribute as much to macroeconomic stability as the automatic fiscal stabilizers initiated after the Great Depression. Her initial focus at Brown University wasn’t economics but philosophy. She will sharpen her view of both and get religion and psychology to boot when she takes the reins in January.