October 11, 2013

When Janet Yellen speaks as Fed chair, the world will listen

If she wins Senate approval, Yellen will be able to dispense an unlimited supply of liquidity if the world stumbles into another financial crisis.

By Joshua Zumbrun
Bloomberg News

WASHINGTON — President Barack Obama’s nominee to lead the Federal Reserve, Janet Yellen, soon may be delivering speeches and setting policies that reverberate not just through the U.S. but around the world.

click image to enlarge

President Barack Obama listens as Janet Yellen, vice chair of the board of governors of the Federal Reserve System, speaks at the White House in Washington on Wednesday, when the president announced he is nominating Yellen to chair the Federal Reserve, succeeding Ben Bernanke.

The Associated Press

“The job of the Fed chair is not just, you know, our top monetary-policy maker,” Obama said during remarks announcing her nomination on Wednesday. “The world looks to the American Fed chair for leadership and guidance.”

If Yellen wins Senate approval and rises from vice chairman to succeed Chairman Ben Bernanke early next year, she will not only need to unite the Federal Open Market Committee around a strategy for unwinding unprecedented stimulus. She also will face a community of international central bankers concerned about the effect of the Fed’s policies on their economies and fiscal policy makers – around the globe and at home – struggling to agree to anything.

“When it’s the U.S. turn to talk, absolute quiet reigns in the world because they want to hear,” said Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics and a former economist in the Fed’s international finance division. “She’s a top-notch academic from the get-go and she’d be head of the Fed, the most powerful economy, first among equals among central banks.”

As well as taking center stage at any international gatherings, she will be empowered to dispense an unlimited supply of liquidity if the world stumbles into another financial crisis.

“People always want to blame their problems on someone else,” Gagnon said. “And the most obvious someone else is always the U.S. and in central banking that means the Fed.”

Tensions between U.S. policy makers and their international counterparts simmered at this year’s Economic Policy Symposium sponsored by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyo. Fed officials were pressed by international policy makers to spell out their intentions better in the interest of safeguarding global growth.

Adapting to advanced countries’ exit strategies is “the most pressing challenge for emerging economies,” Mexican central bank Governor Agustin Carstens said at the gathering in August.

“There are concerns about how she will manage an increasingly obstreperous committee and an increasingly agitated larger community of central bankers,” said Philippa Malmgren, the president and founder of Principalis Asset Management in London. “Let alone how she will manage Congress over the budget issue.”

Yellen is familiar with the complaint that Fed policies are wreaking havoc abroad. She was an attendee and moderator at this year’s symposium, and she was at the central bank in 2010 when foreign policy makers said quantitative easing was flooding their economies with too much liquidity.

Her past remarks show that she is prepared to press on with stimulus until unemployment falls or inflation rises, even if it has consequences abroad.

“It’s not the intention of the U.S. and Fed to make this more difficult,” she said at an International Monetary Fund event in Tokyo last October. “On balance, stronger U.S. growth is beneficial for the entire global economy.”

Yellen is deeply committed to the Fed’s dual mandate, assigned by Congress. She chaired a subcommittee within the FOMC that spelled out the central bank’s goals as 2 percent inflation and maximum employment, which the committee currently estimates to be an unemployment rate between 5.2 percent and 6 percent. Since becoming vice chairman in 2010, she’s never given a speech on monetary policy that didn’t refer to the dual mandate.

“As the world’s most important central bank, there’s a lot of things that can happen when they change policy, but at the end of the day, what they’re given by Congress is full employment and price stability,” said Jay Bryson, global economist for Wells Fargo Securities in Charlotte, N.C. “It doesn’t say anything in there about currencies in the rest of the world.”

(Continued on page 2)

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