A Janet Yellen Primer

Posted by Mark Jasayko, CFA, Portfolio Manager

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McIver Wealth Management Consulting Group / Richardson GMP Limited

President Obama announced today that he is nominating Janet Yellen, currently the Vice-Chairman of the Federal Reserve Board, to role of Chairman.

Yellen has been on my radar screen since the Clinton Administration when she served as Chairman on Clinton’s Council of Economic Advisers. She is a known entity.

In 2008, she spoke at the CFA (Chartered Financial Analyst) Institute’s Annual Conference which happened to be held in Vancouver that year. At the time she was serving as President of the Federal Reserve Bank of San Francisco (one of the 12 regional Federal Reserve Banks). During her presentation, she struck me as a potentially autocratic leader. Prior to listening to her in person, my sense was that she was might have been a more diminutive personality and a wide consensus builder.

In the Q&A session, she came across as extremely confident in what the Fed was doing and that it had done a great job during the decade during which she held on-and-off roles within the Federal Reserve System. This was about four months before the Lehman Brothers collapse which might tell you that there was some over-confidence present. However, during the Q&A she also exhibited some tone deafness as some extremely well qualified delegates had some great but serious questions. Her answers suggested that either she did not grasp the importance of some of the question topics, or dismissed them because they did not fit her perspective or beliefs.

My impression at the time was that she was especially concerned with maintaining economic growth at almost any cost. She appeared to be more concerned about Americans enjoying a high standard of living, even if it resulted from financial engineering. She didn’t seem especially focused on traditional central bank issues such as the general stability of the financial system and the things that could disrupt that. To be fair, Alan Greenspan and Ben Bernanke also fell into this category of central banker. Generally, these central bankers have pushed and pushed for wider powers and much more broad mandates. They see themselves more as general economic guardians as opposed to strictly central bankers.

Yellen will almost certainly be friendly to the current presidential administration and its ambitions for greater spending and bigger government. These ambitions are facilitated by low interest costs on the Federal debt and Yellen is just the person to fight for that.

That said, monetary has lost much of its potency over the last five years with respect to spurring employment and economic growth. If she maintains the rate of money-printing, or Quantitative Easing, well into next year, we could see a situation where the market not longer believes in the efficacy of the policy. It will be very interesting to see what she does in this case which would be an extremely challenging period for someone who sees themselves as an economic guardian.

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