What Would Yellen Do? 5 Key Facts About the Next Fed Chair

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Obama Federal Reserve (Janet Yellen, vice chair of the Board of Governors of the Federal Reserve System, listens in the State Di
AP, Charles DharapakFederal Reserve Board Vice Chair Janet Yellen
President Obama nominated Janet Yellen, vice chair of the Federal Reserve's Board of Governors, to be the next chairperson of the Federal Reserve Wednesday, a choice that comes as little surprise to Fed watchers after former Treasury Secretary Larry Summers bowed out of the running last month. But what will Yellen's appointment as the first woman to lead the U.S. central bank mean for the financial lives of ordinary Americans?

To get an idea of how she'll steer the ship that is the U.S. economy once she takes her seat as Fed chair, let's take a look at what she has already done.

1. Yellen Has Strong Professional Clout

Yellen has plenty of experience with the Fed. She was appointed vice chair in 2010, but before that, she served as president of the San Francisco Federal Reserve Bank from 2004 to 2010 and was on the Fed's Board of Governors from 1994 to 1997.

In addition to an academic career that included teaching stints at Harvard, Berkeley, and the London School of Economics, Yellen served as the leader of the Council of Economic Advisers to President Clinton from 1997 to 1999.

Her work at the Fed began in the 1970s, when she worked as a researcher there. As Washington Post columnist Neil Irwin said of Yellen earlier this year, "She's a very good economist; she has long experience in the Fed system. ... She is a completely sound candidate."

2. Yellen Helped Design the Fed's Most Recent Policy Tools

In the investing world, the Fed's most well-known actions have been its efforts to stimulate the economy through policies like its quantitative-easing programs, which keep long-term rates down and encourage higher levels of economic activity.

Yellen was an important contributor to exploring and implementing these unprecedented actions in the aftermath of the 2007-2008 financial crisis. You can expect her to continue to push hard to ensure that the economic recovery continues and supports greater job growth and overall prosperity for Americans.

3. Yellen Has Been an Insightful Economic Prognosticator

Part of the Fed's job is to predict future economic conditions, and Yellen has an impressive track record on that front.

A recent Wall Street Journal analysis found that Yellen scored best among 14 Fed officials, with particularly good predictions about the future direction of inflation and the labor market. As early as 2005, she identified the housing market's rise as a possible bubble and avoided the mistake of thinking the subprime mortgage crisis in 2006 and 2007 wouldn't balloon into something larger. She sounded an early warning about the potential for the broad-based recession that eventually materialized.

4. Yellen Will Likely Emphasize Creating Jobs Over Fighting Inflation

The Fed has a dual mandate to keep unemployment levels low while also making sure inflation doesn't sap the purchasing power of the wages that Americans earn, or the investments savers hold. Yellen is viewed as being more focused on the Fed's role in promoting job creation, which dovetails with assertions from analysts that she's more likely to continue the Fed's current monetary policies until job gains become more robust.

Yellen hasn't shown indifference to inflation, though. She helped establish the Fed's current 2 percent target for annual consumer-price increases, helping to make the Fed's thought process concerning inflation more transparent. That view stood in opposition to former Fed chief Alan Greenspan, who believed that eliminating inflation entirely should be the Fed's goal, but Yellen produced and gathered research to support her findings.

Nevertheless, some experts remain nervous about Yellen's commitment to controlling inflation, especially if that goal were to conflict with the mandate for employment growth.

5. Expect Her to Keep Seeking Greater Regulation Over Financial Companies

Yellen has supported a wide variety of measures aimed at curbing the practices that led up to the financial crisis. She believes that imposing stringent capital requirements on banks is important to make sure that institutions have the ability to survive unexpected setbacks.

Moreover, Yellen doesn't confine her attention to the banks that are household names, noting that the so-called "shadow banking" system of unregulated participants in the financial industry represents a threat to the economy that should also be subject to greater regulatory scrutiny.

Don't Expect Huge Changes

The nature of the job of being Fed chair isn't one that lends itself to abrupt policy shifts other than in emergency situations, and Yellen isn't expected to seek radical changes.

Instead, you can expect Yellen to put her fingerprint on the Fed gradually, building a legacy of reasoned and measured policy initiatives over the long haul.

That's a big reason why the financial markets have responded favorably to her potential appointment. But ordinary Americans can expect her to champion causes that are important to them as well.

You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger or on Google+.

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13 Comments

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samuri.sansui

I think Obama should hold a nationwide beer summit. Obama was good at that kind of diplomacy.

October 10 2013 at 6:11 PM Report abuse +1 rate up rate down Reply
samuri.sansui

Dan Caplinger, the FED cannot do anything about the unemployment rate and likewise cannot stop American companies from leaving to seek cheaper operating costs in other countries. This has always been the problem. But, today it also seems that this administration is trying to ice the proverbial cake by adding partisan laws to the equation, like ACA, which definitely have an impact on the demographics of manufacturing around the globe. The world banks are still raking in record profits, while trying to manipulate the global economy with the aid of some on capitol hill.

October 10 2013 at 5:19 PM Report abuse +1 rate up rate down Reply
thefacts22

Bernanke "a Bush appointee" has been trashing the dollar since day one,i like classical economists,with a sense for real growth and no gimmicks to promote growth ignoring the fundamental private business ratio of low debt.A nation should be conducted like a Corporation,and only print money as the last choice...A good monetary policy and austerity would be best

October 10 2013 at 3:53 PM Report abuse rate up rate down Reply
chrispnet

"That's a big reason why the financial markets have responded favorably to her potential appointment. "

Really? Based on what magic mirror do you make that assertion? Financial markets don't respond in lock step to one single stimulus. Moron.

October 10 2013 at 7:24 AM Report abuse +2 rate up rate down Reply
1 reply to chrispnet's comment
thefacts22

I guess liberals are easily manipulated

October 10 2013 at 3:55 PM Report abuse rate up rate down Reply
obamaisntgodx

WTF kind of name is Yellen anyway??

October 10 2013 at 12:52 AM Report abuse +1 rate up rate down Reply
barbbberg

They talk about the GOP being a party of old men, but put in an stuck-in-the-old Keynsian economic theories that don't work in a debtor economy; and, boy do we have a debtor economy!

October 09 2013 at 11:11 PM Report abuse rate up rate down Reply
2 replies to barbbberg's comment
thefacts22

A great debt of 17 TRILLIONS,and the Regime acting like there is NO DEBT

October 10 2013 at 3:56 PM Report abuse +1 rate up rate down Reply
samuri.sansui

Obama want dictator economy.

October 10 2013 at 6:23 PM Report abuse rate up rate down Reply
toosmart4u

All you republicans are whinning over the feds printing and spending money. She is going to replace a bush jr. appointee. So your republicans have been running the ship all these years and finally we are going to get a great democrat. Go president Obama. Great job.

October 09 2013 at 4:25 PM Report abuse -8 rate up rate down Reply
4 replies to toosmart4u's comment