After months of rancorous public debate, Fed-watchers finally have an answer: Janet Yellen is next in line to chair the Federal Reserve. The White House said Tuesday night President Obama would nominate the Fed's current vice chairman, who will then face confirmation in the Senate.
Though she's widely respected among economists, many Americans likely do not know much about the longtime Fed veteran. As she starts the process to become one of the most powerful economic policymakers in the world, here are a few things the we could expect to see from a Yellen-led central bank.
1. Dovishness: Yellen is widely considered among the doves on the Fed's Federal Open Market Committee, the arm of the Fed that sets monetary policy. That means she has been more concerned about unemployment than inflation. Yellen has supported low interest rates and the massive asset purchase program known as quantitative easing as a way to stimulate the post-crisis economy, despite fears from some committee members, economists and politicians that these policies will create inflation.
As Yellen said at an AFL-CIO-sponsored conference in February, she believes current unemployment problems are more cyclical – the result of normal business cycles – than structural, arising from more permanent issues like the rise of automation and other technological changes. Therefore, she believes in boosting demand, which she things will stimulate the economy, rather than spark massive inflation.
Her concern over high unemployment, rather than the risk of high inflation, has set her apart from the more hawkish members of the FOMC.
"Yellen's pragmatic reading of the macroeconomic tea leaves has led her to avoid the errors of her theory-bound colleagues who have seen the threat of inflation around every corner," writes University of Michigan economics professor Justin Wolfers in a Bloomberg commentary on the nomination. "Both hawks and doves should applaud this appointment."
2. Some similarities to Ben Bernanke: Yellen has firmly supported Bernanke's policies, such as three rounds of quantitative easing and providing calendar guidance on interest rates. Her similar policy views to Bernanke's may mean a remarkably smooth handoff of the chairmanship, says one economist.
"She's going to be a virtually seamless transition from Bernanke," says Stephen Oliner, a resident scholar at the American Enterprise Institute who spent more than 25 years at the Federal Reserve Board.
"She's going to bend over backwards a little less to find consensus on the FOMC, and I think she's going to perhaps be a little more forthright in conveying her own views to the public than Bernanke has been," Oliner says.
3. Openness: Chairman Ben Bernanke has drastically changed the way the Fed talks to the public, adding press conferences and forward guidance – such as statements about how long the Fed expects to keep interest rates low – to the central bank's repertoire. Expect more of the same from Yellen, who believes increased communication from the Fed has been a positive thing. She believes not only in transparency for transparency's sake, but that communicating helps the bank get things done, as it helps the Fed to guide expectations.
"The effects of monetary policy depend critically on the public getting the message about what policy will do months or years in the future," Yellen said in an April speech. When markets have more information about what might happen next, she said, they can better react by making their own judgments as new data come in, rather than guessing at what the black box of the Fed might do next.
4. Prescience: By the numbers, Yellen has been remarkably right on the money when it comes to predicting the future. A Wall Street Journal analysis in June found that Yellen was the most accurate forecaster among 14 Fed policymakers between 2009 and 2012.
In addition, Yellen is known for having spotted signs of collapse in the housing market far before most of her peers did.
"In terms of risks to the outlook for growth, I still feel the presence of a 600-pound gorilla in the room, and that is the housing sector," she said at a Fed meeting in June 2007. Though her colleagues also saw weakness in housing, they did not express similar concerns. Sure enough, the housing bubble soon burst, creating a prolonged economic downturn.
5. Uncertainty: That is not an insult to Yellen; anyone taking on the role of Fed chairman next would take on the daunting task of unwinding three rounds of quantitative easing. Those massive asset purchases have helped balloon the assets on the Fed's balance sheet from around $900 million at the end of 2008 to around $3.7 trillion today. Bringing that back down will be an unprecedented task, and all eyes in global markets will be on the Fed to see if it can return that total to normal levels without threatening a fragile economic recovery.