The United States Senate opened its 2014 session with an important step Monday, by confirming Janet Yellenas the new Chaiman of the Board of Governors of the United States Federal Reserve System, known colloquially as the “Fed”, in a late afternoon vote.
Or, in regular English, she will now become the new Governor of the US Central Bank at the end of the month, when Ben Bernanke’s own term formally concludes. The Senate vote took place quite unfazed by the extreme inclement winter weather that has put a deep freeze on pretty much everything in many parts of the US.
This had even led to concerns the vote might be put off until Tuesday. But no it took place and the vote was 56 in favour and 26 opposed, with only a simple majority needed and with many Republicans not showing up for the vote. So at the end of the month Janet Yellen will indeed assume the mantle of office to take over the Fed from her very distinguished colleague Ben Bernanke.
Commentators have all reflected that in terms of their economic thinking both hold similar views, and that monetary policy as a result is likely to continue to follow its recent trajectory.
Of course we should all remind ourselves that, under the unique regional structure of the US Federal Reserve System, Janet Yellen must still carry a majority of the votes, with her colleagues, in the collective monetary decisions that they take. As Vice Chairman of the Board of Governors presently, she knows them all well already, so there will at least be complete continuity of relationships.
Formally, the Federal Open Market Committee (FOMC) is the committee of the Fed responsible for setting monetary policy. It consists of the seven members of the Fed’s Board of Governors plus each of the regional Federal Reserve Bank Presidents. There are twelve of those though only five regional bank Presidents vote at any given time, always including the President of the New York Fed plus four of the others who rotate through annual terms.
Specifically such continuity in policy is likely to mean in practice continued very low interest rates, close to the zero lower bound as they are now, perhaps for at least another year and with a commitment to prepare the markets psychologically in advance whenever that is likely to come up for review in the future.
It is also likely to mean a continuation of the beginning of implementing the new policy for the Fed of what is known as “tapering”, i.e. to start the process of very slowly unraveling the gigantic programme of bond purchases by which the Fed has flooded the financial markets with liquidity to the tune of US$85 billion every month.
The Central Bank implemented such a bond buying programme originally after it could no longer reduce interest rates further once they reached essentially zero. The Fed’s initial goal was to help offset the impact of deep recession itself. Second it was then trying to offset the perversely contractionary stance of US fiscal policy that the Congress has been passively implementing. With the Congress in party political grid-lock on macro economic, budgetary and tax policy, compounded by a “sequester” that simply froze many expenditures, billions were taken out of the economy at just the wrong time.
Ben Bernanke had alluded to this himself in his farewell speech last week to the American Economic Society, reported on by Jewish Business News here: [link] and now it will be up to Janet Yellen to administer the medicine herself, by gradually upping the rate at which the Fed’s monthly bond buy backs are reduced. Already last month the total programme was reduced to US$75 billion of such monthly buy backs
Now that financial markets have gotten used to the idea that this will happen and be an on going process already, people no longer seem to quite so fazed by it as they were initially. Financial markets can take absolutely anything it seems – except surprises. Accordingly further reductions will now likely gradually take place until the “patient” is weaned off the “drug” completely, and provided it recovers in the mean time.
Throughout this whole period, since the beginning of the financial crisis of 2007 – 2008, and the deep worldwide recession that has followed it, the impact of Fed monetary stimulus has not yet led to any price inflation, the rate of which remains still about as close to zero as you can safely get.
Indeed the biggest practical concern for many economic policy makers has been the possible onset of persistent deflation instead, which can have even worse consequences for an economy, when firms can become reluctant to hold inventory and consumers can tend to postpone purchases to make cheaper buys in the future. Apparently both evils have, for the moment, been avoided.
Certainly the many conservative doom-sayers who predicted massive inflation, resulting from such easy money policies, have been forced to reconsider, at least for the moment. Many continue to remain in denial on the issue though, as it remains an ideological question as well for them, an article of faith, if you will, and not just a matter of pragmatic economic question where the facts are allowed to just speak for themselves.
Yellen herself in her previous role as Vice Chairman of the Fed had been a strong proponent of the Fed’s continued aggressive steps to boost the U.S. economy as it struggled to emerge from a severe economic recession, and her views are not likely to have changed now she has the top job.
In a move last month, on December 20th, 2013, the Senate had voted 59-34 on December 20 in favour of bringing Janet Yellen’s nomination forward for a final vote, which then took place today. Changes in the rules of the Senate had previously been made by the Democrats to avoid the potential for a Republican filibuster, both for this and a number of other appointments by President Obama as well.
As the first female Governor of the Federal Reserve ever in its one hundred year existence, Janet Yellen is of course about to make history when she is sworn in at the end of the month. One related item of business that will be on the agenda shortly, as well, is for President Obama to now nominate a replacement for Yellen as Vice Chairman of the Fed, also an appointment that will require Senate confirmation.
One of the candidates thought to be in line for the job is former Governor of the Bank of Israel, Stanley Fischer. Highly successful and influential in his previous role at the Bank of Israel, from which he resigned at the end of June of last year, he helped steer that small country through ten years of continuous economic growth, including right through the recent recession that has hurt so many other countries in the world.
Fischer was also once Ben Bernanke’s thesis adviser at MIT, and he, Bernanke and Yellen all seem to be proponents of updated Keynesian economic thought which has been on a come back lately. That is so perhaps because it seems to work better at providing workable policy to cope with recession than other modes of economic thinking. As vice Chairman he could therefore help continue to provide support for a continued sustainable majority for current trends in Fed monetary policy to the new Chairman.