The waiting and the speculation are finally over. President Obama nominated Dr. Janet Yellen as his choice for the next Chair of the Federal Reserve. Now the questions become more focused. What does Dr. Yellen’s appointment imply for monetary and financial policies in the United States? And how will her policy priorities affect the average American?
To help answer these questions, one should begin by noting the difficulty in imagining a candidate more highly qualified than Janet Yellen to lead our nation’s central bank. Dr. Yellen spent her early career compiling a record of scholarly achievement that few others can match, writing well-received research articles for leading economics journals and teaching students at several world-class universities. She more recently served with distinction as President of the Federal Reserve Bank of San Francisco and as Vice Chair of the Federal Reserve System. Those who have worked with Dr. Yellen praise her leadership style—keen attention to detail, willingness to hear opposing points of view, and ability to make sense of even the most complex economic issues.
If confirmed by the U.S. Senate, Dr. Yellen will begin her term as Chair just as the Fed begins the long and delicate process of unwinding effects of unprecedented policy actions taken during and after the financial crisis of 2008. It will take someone with Dr. Yellen’s unique combination of technical expertise and political acumen to meet all of the challenges the Fed’s exit will surely entail.
But together with these tough challenges come significant opportunities, and Dr. Yellen stands in a unique position to solidify and extend some of the very real gains that the Federal Reserve has already made, in large part thanks to her assistance.
First and more important, Dr. Yellen was reportedly one of the main architects behind the Federal Open Market Committee’s decision to announce, early in 2012, an explicit, two percent target for long-run inflation. The significance of this step cannot be overestimated. By announcing clearly their two percent target, Dr. Yellen and other FOMC members recognized that, in the long run, the Fed’s success or failure can only be judged based on its ability to keep inflation low and stable.
The two percent target also reminds us that by stabilizing prices first, the Fed provides the best economic backdrop against which the private economy can deliver rising levels of employment, incomes, and spending. Simply by re-emphasizing her strong support for this inflation target, Dr. Yellen can reassure all Americans that, under her sound guidance, the Fed will never permit the U.S. economy to experience a period of sustained, high inflation—like that seen during the 1970s—nor will it allow the economy to fall into a lengthy period of deflationary stagnation—as it did during the 1930s.
But there is more. As President of the San Francisco Fed, Dr. Yellen was one of the few policymakers to notice and warn of the risks that were building in the financial system that ultimately led to the 2008 crisis. And as Vice Chair of the Federal Reserve System, Dr. Yellen has acknowledged that, in hindsight, the Fed could have and should have done more to address those growing risks before they became unmanageable. As the next Fed Chair, Dr. Yellen can turn those noble sentiments into concrete policy gains, by designing regulatory reforms that both strengthen and stabilize our banking and financial systems.
Dr. Yellen knows that the Fed will always have an important role to play as a lender of last resort, providing liquidity to otherwise healthy financial institutions during times of crisis. Additionally, having witnessed the carnage from the financial crisis firsthand, Dr. Yellen knows that additional institutional and political safeguards are sorely needed, namely to stress that in a vibrant free-market economy no private business can ever be deemed “too big to fail” and also to insure that the Federal Reserve will never again be expected to provide support to insolvent, inefficient, and poorly-run financial institutions at the expense of the general taxpayer.
Stable prices combined with free markets that are governed by fair and easily understood rules provide the necessary preconditions under which our economy has thrived in the past and can thrive once more. Politicians, policymakers, and all Americans can confidently support Janet Yellen as she defends her two percent inflation target and does away with policies that encourage the too-big-to-fail mentality. By doing so, we will work together to ensure that our greatest days, economically, are yet to come.
Peter Ireland is a Professor at Boston College and a member of the Shadow Open Market Committee