Yellen fighting for job growth doesn't give ground on inflation

Craig Torres

Published: Wednesday, Oct. 9 2013 10:11 a.m. MDT

FILE - In this Monday, June 3, 2013, file photo, Janet Yellen, vice chair of the Board of Governors of the Federal Reserve System, answers a question from a participant at the International Monetary Conference in Shanghai, China.

Eugene Hoshiko, Associated Press

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WASHINGTON — In the contest between competing schools of economics, Federal Reserve Vice Chairman Janet Yellen has woven her own path.

While viewed by some on Wall Street and Capitol Hill as a dove on monetary policy, the designated successor to Chairman Ben Bernanke resists those, like International Monetary Fund Chief Economist Olivier Blanchard, who suggest that aiming for a higher inflation target than the current 2 percent would give policy makers more flexibility in setting interest rates.

She also favors the Fed's aggressive expansion of its balance sheet to help steer the economy back to full employment, challenging skeptics, such as Richmond Fed President Jeffrey Lacker, who say the costs of such actions now outweigh the benefits.

"Janet Yellen would be a vigorous proponent of the dual mandate," said Nathan Sheets, former head of the Fed's Division of International Finance, referring to the goals of maximum employment and stable prices Congress set for the Fed. "The quest to appropriately balance the legs of the dual mandate, in the face of a disappointing recovery, is the primary challenge that Yellen would face" as Fed chairman.

Obama will announce the nomination at 3 p.m. Wednesday at a ceremony attended by Yellen and Bernanke, whose term expires Jan. 31, a White House official said in an emailed statement.

Yellen, 67, voices confidence in the ability of monetary policy to stabilize output and boost employment when capitalism fails, a view she shaped under the late Nobel laureate James Tobin at Yale University in New Haven, Conn., where she obtained her Ph.D.

She also holds that aggressive monetary stimulus works only if inflation is anchored around the central bank's target of 2 percent, a view informed by the rational-expectations work of Robert Lucas, a University of Chicago economist who won the Nobel Prize in 1995. Economic models based on rational expectations assume that a credible inflation goal becomes ingrained in consumer and business decision-making, thus helping policy makers hit their target.

While Yellen might run policy "exceptionally easy" in an effort to win more labor-market gains, she has also highlighted in speeches "that there is scope for such policies only if inflation does not rise much above its target," added Sheets, now global head of international economics at Citigroup in New York.

Yellen's day-to-day policy work combines analysis of current economic data with mathematical rigor, said Joseph Gagnon, a former Federal Reserve Board economist. In her speeches, she frequently refers to models and simulations.

"She is very mainstream," said Gagnon, now a senior fellow at the Peterson Institute for International Economics, a non-partisan Washington research group. Monetary policy "will be contiguous" with the past eight years under Bernanke, 59.

Yellen has spent almost a dozen years as a policymaker at the central bank, half of that as president of the Federal Reserve Bank of San Francisco.

Her rise to the top began when she took a job as a staff economist in the Fed's division of international affairs in 1977. There she met another young economist named George Akerlof. They married in 1978, leaving the Fed that year, first for the London School of Economics and then for the University of California at Berkeley.

Work on labor economics became a hallmark of her career. She and Akerlof were co-authors of more than a dozen papers that delved into the mechanics of how people switch jobs and what it means when workers perceive their wages as unfair.

Her immediate task as chairman would be to bring inflation and employment closer to the central bank's congressionally mandated goals.

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