3 Things You Need to Know About Janet Yellen

This morning, Janet Yellen sat down in front of the Senate Banking Committee to begin her confirmation as the next chair of the Federal Reserve.

Coming out of that meeting, many expect that the veteran economist will indeed be appointed replace Ben Bernanke as head of the central bank. Here are three things you need to know about her, based on her testimony today.

1. She understands the weight of her role

I  approach this task with a clear understanding that the Congress has entrusted the Federal Reserve with great responsibilities. Its decisions affect the well-being of every American, and the strength and prosperity of our nation.

That prosperity depends most of course on the productiveness and enterprise of the American people, but the Federal Reserve plays a role too, promoting conditions that foster maximum employment, low and stable inflation, and a safe and sound financial system.

Yellen began her opening remarks with this statement. Many people have noted that if Yellen were appointed, she would usurp German Chancellor Angela Merkel as the most powerful woman in the world. Considering that Forbes magazine recently cited soon-to-be-former Fed Chairman Ben Bernanke as the seventh most powerful person in the world, she would be in elite company.

Moreso than her own elevated status, I think what Yellen is truly getting at in the quote above is the importance of the Federal Reserve. Note that she says "its decisions," not "my decisions." Already serving as the central bank's vice chairwoman, Yellen has supported and will continue to promote a more transparent and open Federal Reserve that is clear in its expectations and actions. Her understanding of the power that the American institution holds shows that she will approach her role with extreme diligence and care as she seeks to continue to keep the economy on track.

2. She believes the financial system is safer since the recession -- but big banks could face changes

The crisis revealed weaknesses in our financial system. I believe financial institutions, the Federal Reserve, and our fellow regulators have made considerable progress in addressing those weaknesses. Banks are stronger today, regulatory gaps are being closed, and the financial system is more stable and resilient.

One of the key roles of the Federal Reserve is to ensure the soundness, safety, and stability of the nation's financial system. This was clearly demonstrated in the recent financial crisis when the Federal Reserve undertook extraordinary actions to help avert an even more catastrophic meltdown. Coming out of the crisis, an immense amount of scrutiny was rightly directed toward the biggest banks, and changes were demanded to ensure the threat they posed was less severe.

To their credit, the banks have made changes. Based on the most recent data from the World Bank, banks have been raising their capital balances (which will insulate against losses) in each successive year since 2008:


Source: World Bank

As you can see, Yellen was right in asserting that things are quantitatively more safe, and we have seen successive improvements with each passing year. However, Yellen cautioned:

We have made progress in promoting a strong and stable financial system, but here too important work lies ahead. I'm committed to using the Fed's supervisory and regulatory role to reduce the threat of a financial crisis. I believe that capital and liquidity rules are important tools and strong supervision are important tools for addressing the problem of financial institutions that are regarded as too big to fail.

For anyone worried that Yellen might take a more relaxed stance on the banks that were at the heart of the financial crisis, like JPMorgan Chase (NYSE: JPM  ) , Bank of America (NYSE: BAC  ) , and Citigroup (NYSE: C  ) , this should ease concerns. For investors in these banks, it is important to see that regulatory changes mandated coming out of the financial crisis are here and are here to stay.

Yellen supporting continued efforts to ensure we have a safer and secure financial system is a good thing.

3. She believes the U.S. economic outlook has improved, but work remains

We've made good progress, but we have further to go to regain the ground lost in the crisis and the recession. Unemployment is down from a peak of 10%, but at 7.3% in October, it is still too high, reflecting a labor market and an economy that is performing far short of their potential.

Yellen rightly noted that since the depths of the financial crisis, the nation's economic situation has improved considerably. The private sector has added 7.8 million jobs, while construction, home prices, and home sales are all on the mend, and the auto industry is almost back to precrisis levels. We are clearly on the road to recovery.

Yet while improvements have been made, it was encouraging to see that she believes that we are by no means where we should be. Many have speculated that the current state of the U.S. economy is the "new normal," with high unemployment and paltry economic growth here to stay. But Yellen clearly recognizes that there is still ample room for improvement, indicating that she will not be content with this new normal and will do all in her power (which is certainly significant) to ensure the U.S. recovery continues.

In her own words:

Our country has come a long way since the dark days of the financial crisis, but we have farther to go.

Beyond today's hearing
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