Confirmation by a politically divided Senate is just the first, and maybe the easiest, part.
Then will come guiding policy for the central bank down a potentially tricky path: maximizing the economy’s potential to grow and create jobs while also staving off the risks of inflation or a new financial crisis.
After being nominated for the job by President Obama Wednesday, the longtime Fed official spoke briefly, and framed the Fed’s job in positive terms.
“We can help ensure that everyone has the opportunity to work hard and build a better life. We can help make sure that inflation remains in check. We can and must safeguard the financial system,” said Ms. Yellen, the Fed’s current vice chair. “We have made progress…. We have farther to go.”
She said that despite the economic recovery since 2009, “too many Americans still can’t find a job, and worry how they’ll pay their bills.” She punctuated that point by adding that “The mandate of the Federal Reserve is to serve all the American people.”
The president, in making the nomination, also emphasized the balancing act ahead, and his confidence that Yellen has the right outlook for the job.
“American workers and their families will have a champion in Janet Yellen,” Mr. Obama said.
He said she’s tough but knows how to listen to competing views and build consensus – a vital skill in a position where power hinges on keeping the members of a 12-person policy committee mostly on the same page.
Obama said Yellen is committed to “both sides” of the Fed’s so-called dual mandate, which includes promoting full employment but also holding guard over the stability of consumer prices and the safety of the banking system.
Yellen’s nomination is still subject to scrutiny by the US Senate, where some Republicans worry that she may be too “dovish” in the long-term fight against inflation.
If confirmed, she would succeed Ben Bernanke, who will depart in January at the end of two four-year terms in the post.
To a significant degree, Obama’s choice of Yellen signals continuity at the central bank. Both Yellen and Bernanke are economists more tied to the intricacies of policymaking than to connections on Wall Street or Capitol Hill.
Both have won considerable praise for their service at the Fed in recent years.
Compared with others at the Fed, Yellen was among the earliest to voice concern about the potential for a housing downturn to deepen.
Both she and Bernanke are viewed as successful advocates for efforts by the Fed to use unconventional ways to stimulate growth – at the time when the policy committee had already brought its short-term interest rate for bank borrowing to essentially zero percent.
Now, in addition to setting low interest rates, the Fed has a bond-buying program (a monetary policy called “quantitative easing,” or QE). And it’s employing new tools of communication: greater “forward guidance” about the Fed’s commitment to keeping rates low for a long time, and a stated target of keeping inflation at about 2 percent a year.
Yellen knows the Fed inside and out, having served at various times as an economist, president of one of 12 regional Fed banks (the one in San Francisco), and more recently as a Federal Reserve System board member in Washington.
Her husband, George Akerlof, is a Nobel prize winner in economics and teaches at the University of California, Berkeley. Yellen has also been an academic economist and their son, Robert, now teaches in the same field. That prompted Obama to quip that their dinner conversations are a little different from most people’s.
Some Senate Democrats quickly announced their support for Yellen.
“Most importantly, she recognizes the need both for monetary policy that supports economic growth and job creation and for financial regulation that prevents a repeat of the financial crisis from which we are still recovering,” said Sen. Carl Levin of Michigan.
By contrast, many Democrats had been skeptical of another potential Obama nominee for the job, Lawrence Summers, who had served as a top economic official under Presidents Obama and Clinton. Their concerns included that he might be too close with big banks.
Still, Yellen may need to address doubts or serious questions from some senators, mostly on the Republican side, during confirmation hearings.
Bernie Sanders, a Vermont independent on the political left who has often voiced criticism of the Fed, said his concerns range from jobs to bank regulation.
“I want to know if she will act boldly and with a fierce sense of urgency to create the millions of jobs that this country desperately needs,” he said in a statement released by e-mail. “Is she prepared to stand up to the greed and recklessness on Wall Street? Does she share the views of the Dallas Federal Reserve president and many others who believe we need to break up too-big-to-fail financial institutions?”
The Fed, in addition to setting monetary policy, has important regulatory roles that include keeping tabs on the health of large financial institutions. The chairman also sits with other top federal regulators on the Financial Stability Oversight Council, a panel created by Congress in response to the nation’s 2008 financial crisis.
Many economists say the current posture of monetary policy is about right. Some 57 percent of forecasters surveyed by the National Association for Business Economics felt that way in a summer survey. And most felt that the Fed’s unusual bond-buying program has helped the economic recovery.
But some economists say Yellen will arrive in the top job at a time when the Fed’s limits are also on display.
Despite the bond purchases, economic growth remains tepid. Those purchases meanwhile have caused the Fed’s pool of assets to mushroom. That raises the question of an “exit strategy” – whether the Fed can steer back to a normal policy stance while avoiding either a run-up in inflation, on the one hand, or a bad recession, on the other.