Janet Yellen, vice chairman of the Federal Reserve, was confirmed Monday by the Senate to succeed Chairman Ben Bernanke as the next head of America’s central bank. Her term, which begins Feb. 1, will mark an important shift in the direction of the bank’s policy efforts, as it begins to “taper” back the past five years of unconventional monetary policy, which have resulted in the Fed pouring some $3.8 trillion into the U.S. economy following the financial crisis.
While Yellen’s appointment marks continuity with the Bernanke era, and with the Fed’s policy of quantitative easing of which she was one of the chief architects, it also heralds a number of firsts. Yellen is the first woman to head the central bank, but even more important, she’s also its first openly reform-minded, Keynesian-oriented leader. A stellar academic economist and 36-year Fed veteran with a particular focus on the human impact of unemployment, Yellen has said on many occasions that the past five years of crisis, joblessness and slower growth “aren’t just statistics to me.”
While former Fed colleagues like Donald Kohn, Alan Blinder and Larry Meyer cite her as among the most data-driven and analytical economists around, she’s also someone who’s more interested in clear, well-articulated ideas with real-world impact than creating the cleverest mathematical models. That commitment was partly inspired by her Yale mentor, the legendary liberal economist James Tobin, who argued that the first priority of economics was to improve the lives of real people.
You can bet that Yellen will be keeping that in mind as she slowly and carefully continues the paring back of quantitative easing that began in December. The challenge will be to keep both the markets and the economy steady as the central bank exits from the largest bout of unconventional monetary policy in history. While the Fed’s dual mandate of keeping inflation and unemployment low will be her first task, there’s currently no conflict there, since inflation is running far below the 2% target that Yellen herself crafted, meaning that tapering doesn’t need to be rushed. She’ll also have her eye on banking reform. Blinder, who was the Fed vice chair back in the 1990s when Yellen was a governor, remembers speaking with her “many times about how the Fed was being too lax on regulation.” And since then, he adds, “things have only gotten worse.”
To do all that, she’ll need to build consensus among a group of Federal Reserve governors who are increasingly independent. Fortunately, says Kohn, who worked with her as a Fed staffer in the mid-1990s, “Janet brings a CEO-type skill set to this job.” He and many others say she’s a “listener and a questioner” who likes to surround herself with the smartest people possible, hear out their arguments, challenge them on any weaknesses, then take her own decisions.
It’s a managerial strategy that seems to have worked, as Yellen has the best track record on policy predictions of any Fed leader since 2009. While she’s often characterized as the “nicest” big-name economist around, no one should mistake that for a lack of spine. “She can get at the strengths and weaknesses of someone’s arguments so quickly,” says Berkeley professor and Haas School of Business colleague James Wilcox, “but so politely. She’s got that ‘iron fist in a velvet glove’ quality.” It’s a quality that will likely serve her well as she steers the most important institute in America today toward a new era of monetary policy.