Nomination of Yellen

14 October, 2013

With Ben Bernanke standing down after 7 years at the helm of the Federal Reserve Bank (FED), many people have been speculating as to who will replace him. The main candidate up until a few months ago had been Larry Summers, a Harvard Economist and former Treasury secretary. However, in the last few months this has changed. Larry Summers has dropped out of the race and Yellen has now been nominated to take Ben Bernake’s place. So what can we expect from Yellen?

Larry Summers was expected to win the nomination for the governor of the FED. However, voices quickly arose amongst the ranks of the democrats, who saw his appointment as a negative for the party faithful. Along with a chorus of academic activists, Obama had no choice but to turn away from Summers and go back to focusing on his second candidate, Janet Yellen. With her nomination as of today, she is expected to continue down the same path as Ben Bernanke, and will also become the first woman president of the FED as well as the first Democrat governor since Paul Volcker - who Headed the FED more than a quarter of a century ago. 

What can markets expect from Janet Yellen? Well firstly, when looking at her academic background, we can see that she has a main focus just like any academic. Her main theory is commonly referred to as “the fair wage-effort hypothesis”. The paper goes into detail regarding unemployment, and how firms look to pay workers a fair wage above the market rate so that productivity will be at its maximum level. Market demand, in turn, is well above what can be applied by employers and we end up with unemployment in the market place. The main founding principal of this theory is that if you pay workers less, they will be less productive, but if you pay them more, they are generally more productive. This paper paved the way for efficient wage theory, and is seen as one of the founding principles for it.

In her time at the FED, Yellen has gone through some rapid transformations. She was appointed by Ben Bernanke to go about allowing more transparency from the FED to the general public. She has also been the most accurate forecaster in the FED from her time as the San Francisco president of the FED. So commentators are expecting much more accurate and conservative forecasting in line with her philosophies when she is elected to head the FED. She is also a believer in tougher financial regulation of the finance sector after the global financial crisis. Her most major attribute though is in communication. Yellen is seen as a masterful communicator who can take the most complex economic problems and break them down so that the general population is able to understand. This is highly valued in an age where transparency is key, and the markets as well as the general public are hungry for information.

So along with her key skills, what else can we expect? So far, the general market view is that Yellen is a dove and not a hawk. A hawk is an economist whose mandate is to control inflation, while a dove’s mandate is generally more focused on unemployment. Yellen’s mandate has been to focus on unemployment as the key statistic of the US economy, which has led to many economists and republicans speaking out against her due to the fact that they believe strongly in controlling inflation before unemployment as one of the core principals of the US dollar.

So what can we expect from this dove? Well,we can certainly expect someone who is far more open and transparent than probably her predecessor. We can also expect that it is likely she will keep interest rates much lower for longer until she sees employment actively picking up, and the US economy starting to grow. While there are fears she won’t pay attention to inflation, she has spoken out and painted it as one of her prime fears and she will look to control it around the 2% target set by the FED in 2012. Certainly, markets are now expecting a weaker USD in the long run because of this, but at the same time, they see US equities getting a boost from her appointment and policies. One thing is clear, and that is she will probably follow in Bernanke’s foot steps in holding off tapering until she sees real growth in the economy.

Written by Alex Gurr, Currency Analyst from Blackwell Global.

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