A step forward for the Federal Reserve
President Barack Obama’s appointment of Janet Yellen to the Federal Reserve Chair last Wednesday was significant for reasons beyond its historic implications. While her place as the first woman to head a central bank in Western history marks a momentous juncture in the fight for gender equality, what truly distinguishes Yellen is her commitment to more expansionary monetary policy.
As a macroeconomics professor of 30 years at the University of California Berkeley, the Chief Executive Director of the San Francisco Federal Reserve for six years, and current Federal Reserve vice chair, Yellen has dedicated her life to understanding and promoting government’s role in combating unemployment. She advocates for government intervention in markets, believing that they do not self-correct during economic downturns or properly function without regulation. In her view, the Fed should prioritize job creation to grow the economy.
“With employment so far from its maximum level and with inflation currently running…at or below the Committee’s 2 percent longer-term objective…it is entirely appropriate for progress in attaining maximum employment to take center stage,” Yellen said in a speech last February.
Yellen’s academic work has greatly contributed to economic thought and policy, particularly the widely accepted “efficiency wage hypothesis,” which theorizes that employers lay off workers instead of cutting their wages during economic downturns to preserve worker morale and thus productivity. She believes that since companies decide to “stick” wages while firing employees, mild inflation, coupled with low interest rates, can act as a stimulus to the labor market. This concept remains the centerpiece of her advocacy for government intervention to promote job growth, and can be viewed as an indicator of her future decisions as Fed chair.
Some economists label Yellen a “dove” for emphasizing the easy money and “maximizing employment” side of the Fed’s dual mandate, opposed to “stabilizing prices.” However, she has stated support for current Chairman Ben Bernanke’s position of raising interest rates and withdrawing monetary stimulus once the unemployment falls below 6.5 percent. She recognizes the threats that too much inflation poses, having stated at a 2006 conference that “the dismal macroeconomic record of the 1970s could have been significantly improved if the Fed had ‘taken ownership’ of the inflation situation- that is, if it had paid close and consistent attention to keeping inflation contained.”
I look forward to seeing how Yellen will continue the Fed’s unorthodox expansionary policies. Bernanke’s quantitative easing, or bond buying as a way to increase money supply, has had a critical role in the financial recovery to this point. The Fed must continue to provide stability until the economy makes a substantial recovery.
Yellen’s experience, both as an academic and government official, has equipped her with the knowledge to progress the recovery and, I believe, make a truly historic impact on monetary policy.
Jack Bevacqua is a freshman in the School of Public Affairs.