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Yellen takes over

Yellen takes over

Why President Obama made the right choice

by Meghnad Desai in London

Thu 10 Oct 2013

President Barack Obama has now done the deed. He has appointed Janet Yellen to Chairman of the Federal Reserve Board. OMFIF has been arguing her case for some months now (click here to read my article ‘Janet Yellen for Fed Chairman' in the June 2013 edition of the OMFIF Monthly Bulletin).

Let us hope Congress does not take too long to confirm her name. Obviously one ground for congressional scrutiny will be the issue of gender. Obama has chosen Yellen on grounds of merit and not just to demonstrate positive discrimination in favour of women. As I put it in an earlier OMFIF Commentary (click here to read) she is 'the best man for the job.’

Yellen has a fantastic track record having been Chairman of the President’s Council of Economic Advisers (CEA); Head of the San Francisco Fed; Vice Chairman of the Fed Board of Governors; and Professor of Economics at the University of California, Berkeley. She has good academic credentials, good managerial experience and is on record as being decisive but also willing to build consensus.

The other major issue is going to be Yellen’s policy stance. As usual, people will ask whether she is a hawk or a dove. Ornithological expressions are used to label people rigidly one way or another. But as her record shows, Yellen is driven by evidence and the analytical tools the Fed has at its disposal. She is a Democrat and so obviously more concerned with the plight of the worse-off, and about employment and growth. But she is no slouch on inflation.

We have to remember that it was under Bill Clinton that the US achieved a balanced budget for the first time in 40 years and in the years since the record has been unsurpassed. Inflation is not likely to be the major concern of the world for two to three years yet. As and when it is, Yellen will be up to it. She will forge a consensus in the Fed to act if the need arises.

The crucial thing is communication. There is no doubt that in his final lap Bernanke has faltered on the communications front. His testimony to Congress in May did not fully clarify that he was proposing a variable rule for tapering and de-tapering as the economy responded. The confusion was compounded in the months following and caused a firestorm in emerging markets last month. Yellen, having been Chairman of the CEA, has been in a more politically exposed position and will know how to communicate the Fed’s intentions clearly.

There is no reason why she should not be an outstanding Fed Chairman.

Lord (Meghnad) Desai, Chairman of the OMFIF Advisory Board, is Emeritus Professor of Economics at the London School of Economics and Political Science.

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