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Editorial: Changing of the guard — the Federal Reserve
Dr. M. Ray Perryman
Guest EditorialJanuary 15, 2014 | 2,012 views | Post a comment
As you have no doubt heard, Janet Yellen has been confirmed as the new chairperson of the Federal Reserve System (Fed). She replaces Ben Bernanke, who will step down at the end of this month. The Fed chair plays an important role in economic growth, influencing monetary policy (and, thus, interest rates, inflation, and ultimately economic growth). Dr. Yellen is an excellent choice for the position.
Ben Bernanke took over the role of chairman from Alan Greenspan (who held the post for almost two decades) in 2006. At that time, the economy looked to be relatively stable. However, as we all know, there was a storm brewing and Mr. Bernanke had to guide the ship of the U.S. economy through some very troubled waters. By early 2010, almost 9 million Americans had lost their jobs, the U.S. real estate market had imploded, and most nations of the world were facing financial crises.
As chairman of the Federal Reserve, Mr. Bernanke pulled out all of the stops to try to control the damage and return the economy to growth in the wake of congressional paralysis, with round after round of quantitative easing (QE). This quantitative easing (through the purchase of tens of millions in various types of bonds every month) has left the Federal Reserve with a multi-trillion-dollar balance sheet. As a result of this inflow of funds into the marketplace, interest rates have been near zero for a long time, encouraging investment and thereby economic recovery.
Although a tentative timeline and framework for exiting the QE program are in place, Dr. Yellen takes over the job dealing with the end of the Fed’s bond-buying program and communicating policy going forward. She will also have to contend with undesirably high rates of joblessness and a particular problem with long-term unemployment. The economy has been expanding, but there is still too much uncertainty for the recovery to gain enough momentum to stimulate sufficient hiring. Also noteworthy is that many of the most powerful tools available to the Federal Reserve have already been used, and further use is unlikely to be as effective. Since the point of quantitative easing is to keep interest rates low and they’re already near zero, there’s not a lot that can be done on that score. In fact, the Fed has been trying to pull arrows from an empty quiver for quite some time.
Running the Fed is an extremely challenging position even at the best of times, and 2014 is likely to be nowhere near “best.” Fortunately for all of us, it would be difficult to find an individual more prepared to take over the Federal Reserve, particularly given the current situation, than Janet Yellen. She has decades of Fed experience, and has been serving as vice chairman. She was involved in the development of the QE programs, and is extremely familiar with every facet of the program, its rationale, and its potential consequences if left in place too long. Her educational and academic background is also strong, leaving her well-equipped to appreciate the complexities and nuances of modern monetary policy.
It’s good to have some continuity, because the last thing the economy needs is yet more uncertainty. At the same time, however, Dr. Yellen brings her own intellect and creativity to the process. She has studied markets extensively, analyzing why they fail and how government intervention can work best. She also has very strong feelings about unemployment, and I have no doubt that she will be unceasing in her commitment to stimulating hiring.
As a math-minded economist, I appreciate Dr. Yellen’s tendency to be highly analytical and driven by data. She was one of the early voices warning that the housing bubble could be a big problem and that the recovery would likely be slow. To her credit, she never forgets that economic statistics are a compilation of the challenges facing real people. This blend, together with her strengths in skills similar to those needed by any chief executive, will certainly enhance her effectiveness.
Dr. Perryman is president and CEO of The Perryman Group perrymangroup.com.
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