Ending months of speculation and consternation at a time of intense sensitivity for financial markets, President Barack Obama has decided to nominate Janet Yellen to succeed Ben Bernanke and become the first Chairwoman of the Federal Reserve, according to unconfirmed reports from several major news organizations quoting White House officials.
The announcement, expected Wednesday afternoon, seems calculated to end at least one source of uncertainty on Wall Street at a time of turmoil caused by the budgetary brinkmanship in Washington.
The appointment of veteran policymaker Yellen provides assurance that there will be a considerable amount of continuity in the leadership of the world's most powerful central bank when Bernanke leaves office at the end of January.
That wasn't always taken for granted during the past four months of gossip and political in-fighting over the Bernanke succession.
It all began June 17, when Obama surprised everyone by essentially saying during a televised interview that Bernanke's days were numbered. Bernanke, he said, "has already stayed a lot longer than he wanted or he was supposed to."
That set off a furor over who would get the top Fed job.
Up until mid-September, high odds were being placed on the nomination of former Treasury Secretary and top Obama economic advisor Lawrence Summers.
That made many people anxious, both on Wall Street and in the Federal Reserve system. Not only did Summers have a reputation for being hard to work with, he was considered more likely to reduce the Fed's extraordinary monetary stimulus, if not actually tighten monetary policy.
There were also concerns about Summers' close ties to large financial institutions and his past support of derivatives deregulation.
All that anxiety vanished when, on Sunday afternoon, Sept. 15 - just a few days ahead of an eagerly awaited Federal Open Market Committee meeting, Summers withdrew his name from contention.
Summers, whom Obama had defended from criticism from Democratic senators and other opponents, wrote the President, "I have reluctantly concluded that any possible confirmation process for me would be acrimonious and would not serve the interest of the Federal Reserve, the Administration or, ultimately, the interests of the nation's ongoing economic recovery."
That cleared the way for Yellen, who unlike Summers had never worked for Obama but had been named vice chairwoman by him. As head of former President Clinton's Council of Economic Advisors, she was considered his second choice.
There was also talk that, because of strong opposition from Democrat Sen. Elizabeth Warren, and others, the President might decline to nominate Yellen and instead choose a third candidate, such as former Fed Vice Chairman Donald Kohn.
The decision to send Yellen's name to the U.S. Senate for confirmation provides considerable clarity to those trying to ascertain the outlook for monetary policy in coming months and coming years.
Yellen has a strong reputation for being a "dove," that is a policymaker who is less inclined to worry about inflation and more disposed to hold interest rates low and pump money into the economy to promote low unemployment. Some fear she might keep monetary policy to lax for too long, generating inflation pressures and financial instability.
But while it is true that Yellen has been a stalwart supporter of the Fed's unconventional monetary policies of recent years, especially its three rounds of large-scale asset purchases or "quantitative easing," she has not always sported the feathers of a that aviary specimen.
Although Yellen, 67, could scarcely be considered a "hawk" on inflation, her record shows that she is not a dove for all seasons.
A respected macroeconomist who got her PhD at Yale University and has taught at the University of California-Berekely, among other schools, she has shown a willingness to adapt to changing economic and financial circumstances.
Since the financial crisis erupted in 2007 and sent the economy into a deep recession, Yellen has unquestionably been a strong advocate of monetary stimulus. First as president of the San Francisco Federal Reserve Bank of and then as Fed vice chair since Oct. 4, 2010, she has advocated slashing the federal funds rate to zero in December 2008 and holding it there.
And, once the zero lower bound for the funds rate was reached, she pushed for both unprecedented balance sheet expansion and "forward guidance" - a guarantee that the Fed would keep rates low for a considerable time even after the economy had recovered and asset purchases had ended.
Transcripts of the Aug. 7, 2007 Federal Open Market Committee meeting show that Yellen was more insightful than many of her colleagues about the economic ramifications of the financial crisis. She told her FOMC colleagues that "the prospects for economic activity have become dicier" and observed that "the market for mortgage-backed securities is now highly illiquid, and there are indications that credit problems are spilling beyond the subprime sector."
Yellen also warned that "the drop in equity prices and rising rates on most risky corporate debt are further negatives for growth."
As the crisis and the recession deepened, Yellen argued that, were it possible, the real funds rate needed to be at least four percent below zero to make up for what she considered to be a big short-fall of aggregate demand and a huge "output gap."
Since cutting short-term rates below zero was not possible, Yellen helped lead the charge for depressing long-term interest rates through massive purchases of Treasury and mortgage backed securities -- a policy that was reaffirmed on Sept. 18.
As head of an FOMC subcommittee on communication, she has also helped refine the Fed's strategy of signaling its intention of keeping rates low and of setting the economic conditions or "thresholds" under which they will eventually be raised.
Far from balance sheet expansion threatening the Fed's "dual mandate" goal of price stability, Yellen argued that, if anything, there was a greater risk of excessive disinflation, if not outright deflation along Japan lines.
Yellen has had little to say publicly in recent months, but in April, Yellen suggested that the economy was nowhere near ready for a withdraw of unconventional monetary accommodation.
"With unemployment so far from its longer-run normal level, I believe progress on reducing unemployment should take center stage for the FOMC, even if maintaining that progress might result in inflation slightly and temporarily exceeding 2%." she said.
However, there have been times in the past when Yellen has sounded like anything but a dove.
As an FOMC voter in 2006, midway in a four-year stay at the San Francisco Fed, Yellen was as "hawkish" as anyone. She voted to increase the federal funds rate from 4.25% to 4.5% on Jan. 31, 2006; to raise it to 4.75% on March 28, 2006; to hike it to 5% on May 10, and to raise it to 5.25% on June 29.
Yellen was also not averse to monetary tightening during her tenure as a member of the Board of Governors from 1994 to 1997. In his book, A Term At The Fed, former Fed Governor Lawrence Meyer recalled that he and Yellen paid a visit to then-Chairman Alan Greenspan and urged him to recommend a rate hike at the September 1996 meeting.
Talking to reporters in Los Angeles in March 2010, Yellen took pains to point out to reporters that she had supported rate hikes 20 times during her career as a Fed policymaker.
Yellen has never dissented against a rate hike.
Good-natured but tough-minded, Yellen is liked and respected by her colleagues, including those who ordinarily find themselves on the opposite end of the policy spectrum.
Philadelphia Fed President Charles Plosser, who has served on the communication subcommittee with Yellen for the past few years, recently told MNI "Janet is smart and capable and would be a fine appointment as chairperson of the Federal Reserve. She would do just fine."
Noting that he has "known her for a long time," Plosser praised "her leadership abilities," and added, "I get along with her just fine."
"She's a consummate professional," Plosser said. "She listens; she's prepared." And he said she would strive to "do the right thing," although she may have "different ideas" about how to do that.
Last week, Atlanta Fed President Dennis Lockhart called Yellen "a very
valued colleague" with whom he "can work closely."
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