It has been widely reported that Federal Reserve Vice Chair Janet Yellen will be nominated by President Barack Obama to succeed Ben Bernanke as the Federal Reserve Chair -- and there are five important quotes that will give you unique insight to her stance and direction on key issues.
Yellen graduated summa cum laude from Brown University, received her Ph.D in economics from Yale, has an honorary doctorate law degree from Brown, and has taught at Harvard, the London School of Economics, and the University of California Berkley. She also served as the chair of the President Clinton's Council of Economic Advisors, and was the president of the San Francisco Federal Reserve Bank for 10 years before she was named Vice Chair of the Federal Reserve in 2010.
Translation: She's pretty smart.
While she is likely one of the most qualified individuals for the job based on her education and experience, her words also tell us she will likely be a great fit.
1. On regulation
"The financial crisis also made clear that international bank rules should focus more on the potential threat to financial stability posed by Systematically Important Financial Institutions."
In a speech at the International Monetary Conference in June, Yellen highlighted that while there has been considerable progress made in banking regulation through the Basel III framework, more needs to be done -- particularly for those banks designated to be systematically important.
In the U.S., that list includes:
- Bank of America (NYSE:BAC)
- Bank of New York Mellon
- Citigroup (NYSE:C)
- Goldman Sachs
- JPMorgan Chase
- Morgan Stanley
- Wells Fargo (NYSE:WFC)
Any banker at the largest institution hoping that Yellen would be a proponent of less regulation is sure to be disappointed as she also noted, "Although we have made the financial system safer, important work remains." To that end, investors must know the dialog surrounding the new regulatory environment is likely to continue for some time -- with the biggest banks in the country being most effected.
Yellen also highlighted that "the efforts of the Federal Reserve and the global regulatory community have focused principally on producing stronger regulations to reduce the probability of default of such firms to levels that are meaningfully below those for less systemically important financial firms." So while the big banks may face the brunt of regulation, smaller regional outfits like Huntington Bancshares (NASDAQ:HBAN) and Fifth Third Bancorp (NASDAQ:FITB) could be set to benefit.
2. It's not all bad news for big banks
"Some have proposed ideas for more sweeping restructuring of the banking system to solve too-big-to-fail. These ideas include resurrection of Glass-Steagall-style separation of commercial banking from investment banking and imposition of bank size limits. I am not persuaded that such blunt approaches would be the most efficient ways to address the too-big-to-fail problem."
While many have proposed a breakup of the largest banks separating their traditional and investment banking operations, Yellen is clearly not an advocate of such sweeping measures. And with that, many of the bankers at Bank of America, Citigroup, JPMorgan, and Wells Fargo likely breathed big sighs of relief.
While Yellen notes that she is "not convinced that the existing SIFI regulatory work plan, which moves in the right direction, goes far enough," she is not a fan of the broad changes that would change banking as we know it.
3. Let's talk about it
"The effects of monetary policy depend critically on the public getting the message about what policy will do months or years in the future."
Many have lauded Yellen for her willingness to be open about Federal Reserve Policies as she not only changed how the Fed's forecasts were communicated in 2007, but she was also responsible for ensuring that the Fed's guidance was linked to certain thresholds for unemployment and inflation in 2012.
Considering the financial markets are driven by both past performance expectations of future performance, a more open Federal Reserve Chair will assuredly be a good thing.
4. Addressing concerns
"Some have asked whether the extraordinary accommodation being provided in response to the financial crisis may itself tend to generate new financial stability risks. This is a very important question."
While this is a quote from a speech in April, it is likely very appropriate for many of the Republicans who may oppose Yellen's nomination because she supports more accommodating Federal Reserve policy. This is likely understandable, as many have voiced concerns that former chair Alan Greenspan's open stance was a contributing factor in the financial crisis.
However, Yellen's willingness to address concerns is assuredly a good thing to see. Following the quote above, she stated; "I don't see pervasive evidence of rapid credit growth, a marked buildup in leverage, or significant asset bubbles that would threaten financial stability. But there are signs that some parties are reaching for yield, and the Federal Reserve continues to carefully monitor this situation," a statement underpinning the reality that she is willing to carefully monitor the Fed's actions -- and both the risks and the rewards associated with those actions -- which is undoubtedly positive.
5. Moving forward
"With unemployment so far from its longer-run normal level, I believe progress on reducing unemployment should take center stage for the [Federal Reserve], even if maintaining that progress might result in inflation slightly and temporarily exceeding 2 percent."
The final quote found above was from a speech in April, when unemployment was at 7.7%, and while unemployment is down from there -- as it now stands at 7.3% -- it is still a long way from the long-run normal rate below 6%. Here we see Yellen understands that assisting the American workforce in its recovery is her primary goal -- which will be helpful for us all.
While Yellen's appointment is still subject to a Congressional vote, the five quotes found above should give us all a bit more understanding and confidence in both her direction and desires as the new Fed Chair.