Janet Yellen takes the helm of the Federal Reserve February 1.  She will be the first female head of the Central Bank.  Just what kind of leader will she be?  That’s the question we ask this week.

She is a first rate academic uniquely qualified to address the current labor market malaise.  She cares more about the real economy, the human face of the economy.  We also expect she will maintain a pledge of not raising rates until well beyond inflation/unemployment thresholds are reached.  Under her leadership we can expect a “dovish” approach with low interest rates at least for a couple more years.

Janet Yellen:  What’s Ahead for the Fed?  Yellen “is widely respected as a first-rate academic economist with decades of real world experience…

[she] sounded early warnings about housing market risks that soon proved correct when the 2008 financial crisis hit…Yellen is unlikely to spring any surprises.  Besides strongly supporting clear communications to the public she has definite views of what works and what doesn’t…with unemployment continuing to dog the recovery, Yellen may be just what is required for the times…Yellen is an expert in labor markets and may be uniquely qualified to address the current labor market malaise…Yellen’s research has focused on the cost of long-term unemployment and the danger of a high unemployment rate.”

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How will Yellen’s interest in the ‘human face’ of economics influence policy?  “She has already made it clear that joblessness is one of her main concerns…she comes out of a very activist tradition, the Keynesian tradition…we can expect to see her focus on the employment issue in a way that I don’t think we have seen a Federal Reserve chairman do for a while….she is someone who really cares a lot about the human face of economics…unemployment is not just a bunch of statistics.  It’s also very much about human lives…for that reason alone, we certainly can expect her to take a much softer policy line than some of her predecessors….I think what she is not going to do is withdraw the stimulus the Fed has put into the economy in the last couple of years in a very rapid manner…she is someone who is really looking for a gentle exit strategy that at least tries to maintain the stimulus and keep the economic machine going…she cares far more about the real economy, the human face of the economy…and that could bring quite a different tone to the kind of policy debate from what we have seen before…she takes a much more holistic view about how economic processes work.”

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Janet Yellen & ‘Optimal Control’ Forward Guidance.  “Mrs. Yellen believes in forward guidance—the idea of pledging not to raise rates until inflation/unemployment thresholds are breached, which serves to lower future expectations of interest rates.  She will communicate that ending quantitative easing does not imply an imminent ending of forward guidance. The Fed therefore appears to be committed to the current economic recovery reaching escape velocity.”

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And in case you missed it, click here to read last week’s blog post which the economy and stock market in the New Year.

We hope you enjoy reading these articles along with us and that you find them informative.  Please forward this to your friends and family.

J. Mark Nickell & Co.

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