Federal Reserve's Yellen: Fearless and candid

Paul Davidson | USA TODAY





WASHINGTON — At a Federal Reserve meeting in June 2007, Fed Chairman Ben Bernanke said the weakening housing market posed "downside risks" to growth, but otherwise "the economy looks to be healthy," according to a meeting transcript.

San Francisco Fed President Janet Yellen stood out among Fed policymakers that day for her ominous outlook. "I still feel the presence of a 600-pound gorilla in the room, and that is the housing sector," she said. "The risk for further significant deterioration in the housing market, with house prices falling and mortgage delinquencies rising further, causes me appreciable angst."

Yellen, of course, turned out to be right, as the real estate investment bubble burst, triggering the Great Recession and the financial crisis.

Now the Fed's vice chair, Yellen is in contention with former Treasury secretary Larry Summers to succeed Bernanke as Fed chief. President Obama is expected to decide within weeks whether Yellen's prescience and knack for consensus-building, among other strengths, will win her the job over Summers, who is considered a brilliant if abrasive economist, was a key Obama adviser during the financial crisis and is closer to the president.

With the economy expected to pick up next year, Yellen is also seen as somewhat less "hawkish," or vigilant about inflation, than Summers and more of an economic "dove" focused on stimulating economic growth. Interviews with colleagues and friends, however, reveal a far more nuanced portrait of a meticulous economist who has voted consistently to raise interest rates to ward off rapidly rising prices and held her ground against legendary former Fed chairman Alan Greenspan.

"Janet is very tough — tough in her views and tough in her independence," says Laura D'Andrea Tyson, a friend and former Clinton administration official who recommended Yellen for her first stint on the Fed's board in the 1990s.

CNBC reported last week that Obama is prepared to pick Summers in a few weeks. The White House said only that Obama hasn't made a decision, which will be announced in the fall. Bernanke's term ends in January, and he's widely expected to step down.

Yellen would be the first woman to take the Fed's reins, one of the world's most powerful jobs. Her faceoff with Summers has evoked the passions of a baseball pennant race, with Washington's political elite lining up behind one or the other candidate. Senate Democrats signed a petition backing Yellen in July. Even singer and actress Bette Midler weighed in, tweeting her worries about Summers' resistance to regulating banks before the financial crisis.

Yellen is uncomfortable with the circus atmosphere that has surrounded the nomination but touched by the outpouring of support, say people close to her who could not be named because of the private nature of their conversations with Yellen. She considers herself the underdog in the contest to chair the Fed, these people added. Yellen declined to be interviewed.

The next Fed leader will have to forge consensus on a Fed policymaking committee that has voiced widely divergent views on how quickly the Fed should pull back its bond-buying stimulus as the recovery gains steam. Few would be better than Yellen at uniting the diverse group, says Alan Blinder, who served with Yellen on the Fed's board in the 1990s and is now a Princeton economics professor. "She takes the other person's viewpoint seriously and marshals arguments on the other side without being sharp-edged about it," Blinder says.

Former Fed board member Alfred Broaddus, who was known as an anti-inflation "hawk" and often clashed with Yellen on policy issues in the 1990s, says, "She's firm in her belief, but she was always respectful to me. It was always a collegial disagreement."

Yellen has played a central role in major Fed initiatives the past few years. Those include setting a formal 2% target for annual inflation and a policy to keep short-term interest rates near zero at least until the unemployment rate falls to 6.5%, as long as the inflation outlook is no more than 2.5%. Yellen also has worked closely with Bernanke to establish more open communication with financial markets and the public.

While Yellen and Bernanke share a collaborative style and pro-growth policies, Yellen is regarded as even more fixated on stimulating the economy and job market. In speeches, she has advocated an "optimal policy" that could allow annual inflation to modestly exceed the Fed's 2% target to make up for slower growth early in the recovery and possibly keep interest rates near zero even after the jobless rate reaches 6.5%.

In a speech last February, she spoke of the human toll wrought by long spells of unemployment. "These are not just statistics to me," she said. "We know that long-term unemployment is devastating to workers and their families."

Allan Meltzer, a professor of political economy at Carnegie Mellon University, says Yellen is ill-equipped to stave off rising prices as the economy accelerates because she is too focused on joblessness. "Janet Yellen will certainly be slow to respond to inflation," Meltzer says.

He adds that "she is unlikely to be credible" to financial markets as an inflation-fighter. If he's right, that could endanger the recovery if spooked investors, fearing an overheating economy, react by pushing up interest rates sharply.

Broaddus, however, says the higher priority Yellen now places on employment over inflation "doesn't concern me unduly." He noted that Yellen never had to deal with rapidly rising wages and prices, as he did as a Fed policymaker in the 1970s. "If she had, there's no reason to think she wouldn't have joined the rest of us in fighting it."

Yellen, in fact, has been on both sides of the inflation debate and never hesitated to take on the sometimes-imperious Greenspan. In July 1996, when Greenspan argued for trying to drive inflation to zero, Yellen disagreed, saying some inflation helps lower unemployment.

Says Blinder, "There was … a very strong tendency to defer to (Greenspan). (Yellen) was never cowed" from expressing a different view.

Later that year, Yellen began to worry about inflation. She and Fed board member Laurence Meyer went to Greenspan's office and unsuccessfully made a case for raising interest rates to head off sharply rising prices.

"We were like one," says Meyer, who was generally more of a hawk than Yellen on the Fed's need to stay vigilant about keeping inflation low. "There was no discussion. (Greenspan) said, 'Thank you and goodbye.' We were both amused."

Yellen, 67, was raised in a working-class neighborhood in Brooklyn. With an easy smile that bursts across a face framed by a shock of white hair, Yellen speaks in a deliberate voice that still bears traces of Brooklyn.

Her father, a doctor, and mother, an elementary school teacher, who quit to raise Yellen and her brother, lived through the Great Depression and raised Yellen's consciousness early about the ravages of unemployment. A high school math honors student and class valedictorian, Yellen majored in economics at Brown University, attracted by the potential to create jobs and help people.

After earning a Ph.D. at Yale, she joined the Fed as a staff economist in 1977, where she met her future husband, George Akerlof, who went on to win the 2001 Nobel Memorial Prize in Economic Science. They share similar views and have collaborated frequently on research papers. Yellen sometimes reins in Akerlof's creative salvos.

"George will write something, and Janet will say, 'That's not good,' " says Christina Romer, an economist at the University of California-Berkeley and a longtime friend who formerly headed Obama's Council of Economic Advisers.

Yellen taught economics at Berkeley before returning to the Fed as a board member in 1994. There, she built a reputation as uncommonly prepared and fastidious. At Fed meetings, policymakers take turns giving their views of the economy and interest rates, often speaking off-the-cuff. But Yellen routinely delivered precisely crafted remarks.

After heading President Clinton's Council of Economic Advisers from 1997 to 1999 and then returning to teach at Berkeley, Yellen became president of the San Francisco Fed, overseeing a region that turned into the epicenter of the housing bubble. Yellen cajoled various units of the Fed bank, such as bank supervision and payment systems, to work more closely and share information on teetering banks, says her chief banking regulator at the time, Stephen Hoffman.

"She had the ability to be able to bring people together to address a very challenging and difficult environment," Hoffman says. "She did not micromanage you. You knew your role and responsibilities, and she backed you."

After foreseeing the housing crisis in 2007, Yellen correctly predicted in a summer 2009 speech that "the pace of the recovery will be frustratingly slow." She was recently assessed by The Wall Street Journal to be the most accurate of 14 Fed policymakers based on more than 700 predictions about the economy and inflation from 2009 to 2012.

In 2010, Yellen left the San Francisco Fed to become the U.S. Fed's vice chair. And she continues to work with Akerlof on economic papers. They occasionally escape from the grind, taking beach vacations with their son, Robert Akerlof, who is also an economist. They typically pack a suitcase of economics books.

"They never go into the water," Romer says. "They sit back and look at the water and read and write, and they're very happy."