Update: On Oct. 8, administration officials said the White House would nominate Yellen to be the next Fed chair.
Former Treasury Secretary and head of President Obama’s Council of Economic Advisers Larry Summers officially withdrew from consideration for the next chairmanship of the Federal Reserve, according to a letter submitted to Obama on Sunday. The move was likely catalyzed by Montana Senator Jon Tester’s announcement that he would not support Summers’ nomination to succeed Ben Bernanke should it come to a vote on the Senate Banking Committee, where Democrats have a three-vote majority. The revelation came after two other Democrats on the committee — Jeff Merkley of Oregon and Sherrod Brown of Ohio — announced their opposition to Summers’ candidacy.
With Summers out of the running, the field is clear for current vice chairwoman of the board of governors of the Federal Reserve, Janet Yellen. Here are five things everyone should know about America’s (likely) next economist in chief:
1. Yellen is not a creature of Wall Street: Summers’ fiercest critics argued that he has a long history of coddling big Wall Street banks and, as Fed chair, would not regulate them with the enthusiasm necessary to keep the U.S. financial system safe. Though Summers has spent much of his career in academia or as a public servant, he has ties to big Wall Street banks. His original sin is to have been a proponent of financial deregulation during the end of the Bill Clinton years, which helped set the stage for the financial crisis. Summers fought against the passage of the Volcker rule, which prevents banks from speculating with government-insured deposits, in 2010.
(MORE: Why Summers Didn’t Get the Job)
Yellen, on the other hand, has spent the past 20 years with the Fed, save for a stint on Clinton’s Council of Economic Advisers. Though her track record on regulation is more difficult to evaluate, the Center for Public Integrity reviewed years of Yellen’s speeches, meeting transcripts, government testimony and reviews of bank failures, concluding that she has what it takes to be America’s top bank cop. “Yellen now appears determined to ensure that banks fortify themselves against financial shocks and that regulators have the power to police the system,” it stated.
2. Yellen’s had a (relatively) good track record of economic predictions: Economists aren’t terribly good at predicting the future. Yellen appears to be better than most. The Wall Street Journal reported earlier this summer that after it “examined more than 700 predictions made between 2009 and 2012 in speeches and congressional testimony by 14 Fed policymakers,” Yellen came out as the most accurate. Yellen has also been given credit for warning about the real estate bubble as early as 2005. Why’s it matter? See the next point.
3. She was an architect of Bernanke’s unconventional monetary policies: Accurate forecasting is important because the better your forecasts, the more effectively you’ll be able to set monetary policy in the present. But as the most recent financial crisis proved, a good Fed chief needs to be willing to think outside the box to achieve its goals of low, steady inflation and full employment. This is exactly what Bernanke did — using the powers of his office to launch a massive bond-buying program aimed at lowering interest rates further down the yield curve and promising to keep short-term interest rates at near zero for years. Bernanke, however, didn’t launch these programs immediately. Behind the scenes, it was reportedly Yellen who was the most forceful advocate for the Fed doing more to help stimulate the economy.
4. The White House was reluctant to nominate Yellen: Since the White House began floating Summers’ name as the favorite for the Fed post, it has been getting a lot of criticism from lawmakers, economists and the chattering classes. President Obama was seemingly undeterred by this opposition. It wasn’t until a smooth confirmation became practically impossible with Senator Tester’s announcement, that he accepted the idea of a Summers-less Fed. This raises the question of whether Obama was hoping to have someone closer to his inner circle at the central bank. It is possible that a Yellen Fed would be more distant from the White House politically than the Federal Reserve envisioned by the President.
5. She’d be the first female head of the Federal Reserve: Confirming Yellen as the first chairwoman of the Federal Reserve would be a historic move for an Administration that has received criticism for lack of progress appointing women to senior positions. It would also add a healthy dose of diversity to the realms of central banking and finance in general. Though 45% of Federal Reserve employees are women, few are in top positions. In all G-8 countries, there has been only one female central-bank head in history: Russia’s Elvira Nabiullina, who was appointed just this year.