On Wednesday, President Obama nominated Janet Yellen to succeed Ben Bernanke at the top of the Federal Reserve. If her nomination is confirmed, Yellen will step into arguably the most powerful economic policymaking role in the world at a critical time for the Fed. Indeed, the central bank is beginning to craft its exit from unprecedented monetary alchemy (or "quantitative easing", in scientific terms), while facing an economy that is still struggling to gain traction.
Painted as a monetary-policy "dove," Janet Yellen looks to me like a smart, pragmatic policymaker, but there is no better way of getting to know this crucial figure than through her own words. Following are 22 quotes that offer some insights into the mind of the next Fed chairwoman.
On dinner-table conversation at home
"The truth is, if you spent an evening at our house you would probably hear economics discussed over the dinner table. My husband [Nobel prize-winning economist George Akerlof] and I work together, we're both economists, and the bulk of our friends are economists. You would eat a diet that is richer in discussions of economics and policy issues than many people would find appetizing." (June 1995)
On gender equality in the workplace and her own experience
Note: If confirmed by the Senate, Janet Yellen will become the first woman to head the Federal Reserve.
"It seems to me that women have made an awful lot of progress, but they probably remain underrepresented, at the highest levels of most organizations, for a variety of reasons. And it's probably going to take a long time to change that. I've had a lot of opportunities in my life. I don't feel that I've faced discrimination. I've had every chance to succeed and more, and I think that's what all women should have." (June 1995)
On her faith in the Fed
"To me the greatest asset of the Fed is the people. We have a tremendously dedicated staff. ... They feel proud to work for the Fed, because this is such a competent, professional and well-respected organization. I feel proud of the organization, too; I wouldn't have wanted to come back unless I felt that way." (June 1995)
"I will be the first to say that it is always difficult to get monetary policy just right. But the Fed's analytical prowess is top-notch, and our forecasting record is second to none. The FOMC [Federal Open Market Committee] is committed to price stability and has a solid track record in achieving it." (June 2009)
On the level of Fed transparency
"The level of transparency and communication has increased by an order of magnitude (since the mid-1990s). We're trying to be as clear as we can about what we expect the future path of interest rates to be." (November 2012)
On income inequality in the U.S.
"[Sen. Don Riegle, D-Mich.] pointed to one of the most disturbing and fundamental long-term secular shifts in the American economy that we have seen in recent decades. American workers have faced serious difficulties in the labor market since the first oil shock in 1973. Since that time, the pace of productivity advance has slowed for reasons which are still not understood, lowering the rate at which living standards have advanced. Even more disturbing, wage inequality has risen, with young men with high school diplomas, for example, experiencing real wage losses of roughly 25 percent from 1971 to 1988. These trends have frustrated the aspirations of many Americans." (June 1995)
The low saving rate: An emerging risk
"Let me turn to two factors that are not now, but have the potential to be, drags on the economy going forward. First is the very low personal saving rate, which has fallen over the past decade from about seven percent to under half a percent in the third quarter of this year. Part of the reason that consumers are saving so little out of disposable income is that interest rates are low. In addition, their wealth has been on the rise; in the latter half of the 1990s, rising stock prices had a lot to do with the increase in wealth, but more recently, the main impetus has been house price appreciation. With interest rates rising now and housing prices unlikely to continuing advancing at their recent robust pace, consumers may want to get their finances in order and curtail their spending in order to bring the saving rate up to more normal levels." (December 2004)
A "bubble element" to housing
"There are downside risks to economic growth relating to the housing market. This sector has been a key source of strength in the current expansion, and the concern is that, if house prices fell, the negative impact on household wealth could lead to a pullback in consumer spending. Certainly, analyses do indicate that house prices are abnormally high -- that there is a 'bubble' element, even accounting for factors that would support high house prices, such as low mortgage interest rates. So a reversal is certainly a possibility. Moreover, even the portion of house prices that is explained by low mortgage rates is at risk.
"My bottom line is that while I'm certainly not predicting anything about future house price movements, I think it's obvious that a substantial cooling off of the housing sector represents a downside risk to the outlook for growth." (October 2005)
On bank regulation, including with regard to "too big to fail"
Note: Under the Dodd-Frank act, the Federal Reserve supervises and regulates systemically important financial institutions, or SIFIs -- in layman's terms, institutions that are too big and/or too interconnected to fail. They include Bank of America (BAC 1.97%), Citigroup, JPMorgan Chase, Goldman Sachs, and Wells Fargo.
"It is important to emphasize that small banks have been and continue to be able to retain their market share and profitability in competition with larger banks. Our staff has done repeated studies of small banks; all these studies indicate that small banks continue to perform as well as, or better than, their larger counterparts, even in the banking markets dominated by the major banks." (October 1995)
"The Board is committed to the view that banks should be allowed to engage in securities underwriting, as long as this occurs with appropriate safeguards. We don't think this activity is particularly risky, and there would be benefits both for the industry and for consumers." (June 1995)
"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. But at the same time I'm not convinced that the existing SIFI regulatory work plan, which moves in the right direction, goes far enough." (June 2013)
On failing to anticipate the credit crisis
"For my own part, I did not see and did not appreciate what the risks were with securitization, the credit ratings agencies, the shadow banking system, the [structured investment vehicles] -- I didn't see any of that coming until it happened." (Nov. 15, 2010)
From 2004 to 2010, Yellen was president and chief executive officer of the Federal Reserve Bank of San Francisco, which oversaw the nation's largest mortgage lender, Countrywide Financial. Countrywide was acquired by Bank of America in 2008; by July 2012, The Wall Street Journal reported that the acquisition had cost B of A more than $40 billion in losses, legal costs, and settlements.
Anticipating a slow recovery
"It's often the case that growth in the first year after a recession is very rapid. That's what happened as we came out of a very deep downturn in the early 1980s. Although I sincerely wish we would repeat that performance, I don't think we will." (June 2009)
On the risk of inflation
"Now, though, all I hear about is the danger of an outbreak of high inflation. I'll put my cards on the table right away. I think the predominant risk is that inflation will be too low, not too high, over the next several years." (June 2009)
(Note: Over the ensuing four-year period, inflation averaged 2% annually, significantly below the 3.2% average over the 100-year history of the CPI series.)
"A glance at history shows that many countries with massive structural deficits and without an independent central bank turned to the printing press to pay off their debts. That's a recipe for high inflation and, in some cases, hyperinflation. But I don't believe the United States faces that threat. Looking back in history, runaway fiscal deficits have often been accompanied by high inflation. But, since World War II, such a relationship has only held in developing countries. In countries with advanced financial systems and histories of low inflation, no such connection is found." (June 2009)
On the risks associated with quantitative easing
"A second reason that some observers worry that the Fed's asset purchase programs could raise inflation is that these programs have increased the quantity of bank reserves far above pre-crisis levels. I strongly agree with one aspect of this argument -- the notion that an accommodative monetary policy left in place too long can cause inflation to rise to undesirable levels. ... In contrast, I disagree with the notion that the large quantity of reserves resulting from our asset purchases poses some special barrier to removing policy stimulus when the right time comes." (January 2011)
"I don't think [Fed policies are] causing a danger. ... Is our policy a magic wand? No, it's not. But is it working? Yes, I think it is working." (November 2012)
On the market impact of the Fed's exit from unconventional policy tools
"When policy turns from more accommodative to more restrictive, that's going to be a market-sensitive event. It always is." (November 2012)
To get a sense of this, simply consider the way the stock market reacted to the notion of a pullback in the Fed's bond-buying program ("quantitative easing"). The following graph shows the 1-month performance of the S&P 500 and the Dow Jones Industrial Average (^DJI 1.13%) from May 21, the day Ben Bernanke mentioned the "taper" for the first time:
On the outlook for the U.S. job market
"It will be a long road back to a healthy job market. It will be years before many workers feel like they have regained the ground lost since 2007. Longer-term trends, such as globalization and technological change, will continue to pose challenges to workers in many industries. Let me close with some words of encouragement. The job market is improving. The progress has been too slow, but there is progress. My colleagues and I at the Federal Reserve are well aware of the difficulties faced by workers in this slow recovery, and we're actively engaged in continuing efforts to promote a stronger economy, more jobs, and better conditions for all workers." (February 2013)
On the risks associated with U.S. budget deficits
"It is essential that we come to grips with structural budget deficits, but not because such deficits will cause inflation. It's because large, sustained structural deficits vacuum up savings that could be put to more productive uses. Once the economy is back on track, these deficits will make capital more expensive for private borrowers, crowding out the investments that are essential to boost productivity and fuel growth in real wages and living standards."
"Consider the case of the large deficits in the United States in the 1980s. We did not see a run-up in inflation then. On the contrary, the deficits soared just as inflation was coming down. Those deficits did, however, contribute to higher interest rates, which made education and investment more expensive." (June 2009)
