At Fed, Yellen uses academic approach

Staff Writer
Columbus CEO

(c) 2013, The Washington Post.

WASHINGTON — When Janet Yellen jumped from academia to the Federal Reserve Board, she seemed like a new breed at the buttoned-up central bank — eating lunch with staff in the cafeteria and debating ideas like she was back in the faculty lounge.

Nearly two decades later, Yellen still carries the air of a scholar, applying a rigorous theoretical approach to America's economic challenges, particularly unemployment. She is less experienced in the fast-moving world of high finance or in making knife's-edge decisions in the midst of a crisis.

Yellen, now the No. 2 at the central bank, has emerged as one of the administration's top candidates to replace Ben Bernanke as America's economist in chief and would be the first woman to lead the Federal Reserve.

President Barack Obama's choice — which appears likely to be between Yellen and combative former Treasury secretary Larry Summers — will determine what set of skills will guide the U.S. economy out of its long slump and grapple with whatever nasty surprises lurk along the way.

In interviews with more than a dozen people who have worked closely with Yellen, the portrait that emerges is of a careful and deliberate thinker who has been mostly correct in her assessments over the tumultuous past six years of crisis, recession and grinding recovery. She has been a strong intellectual force within the Fed, a tough taskmaster for staff and single-minded in her desire to push down joblessness. She has been less inclined to wring her hands over the risks that the Fed's easy-money policies could create new bubbles or stoke inflation.

If Obama appoints her to the top job, the open question is not what her approach will be to guiding the nation's monetary policies; she has given detailed speeches explaining what she envisions for U.S. interest rate policy in the years ahead. Rather, it is how she would adapt to a role in which she is the person in charge.

Janet Louise Yellen was born in 1946 and grew up in Brooklyn before studying at Brown University and then pursuing a doctorate in economics at Yale University. During an early stint as a Fed staffer, she met another young economist, George Akerlof, who would become her husband, a frequent professional collaborator and eventually a Nobel Memorial Prize winner.

At the University of California at Berkeley, Yellen studied the crucial question of why labor markets don't function like other types of markets. In particular, she looked at why, in a recession, people go without work rather than take a lower wage — of particular interest in the past few years of high unemployment.

In 1994, Yellen — who declined to comment on the record for this article — was recruited by Clinton administration adviser Laura D'Andrea Tyson to come to Washington as one of seven Federal Reserve governors.

"She was not afraid of saying what she thought and why she thought it," said Alice Rivlin, who served during that era as the Fed's vice chairman. "She was an intellectual leader on the board."

Early in Yellen's tenure, a debate was emerging on whether the central bank ought to adopt an annual inflation target, such as 2 or 3 percent. To air the issue, Chairman Alan Greenspan decided to hold a debate during a private session of the Fed's policy committee: Al Broaddus, the president of the Federal Reserve Bank of Richmond, Va., would argue for inflation targeting, while Yellen would argue against it.

Yellen and Broaddus managed to reach some consensus on how they would tackle the issue, but Greenspan froze the discussion. It was a position Yellen would find herself in more than once in Washington: She might have an influential voice, but others made the final decisions.

Similarly, Laurence Meyer, who served as a Fed governor with Yellen, has recounted a story in which the two of them decided the Fed needed to raise interest rates to lower the risk of inflation. They went to Greenspan to present their case, threatening to dissent openly if he did not steer policy that way. "He listened, more or less patiently," Meyer wrote later. "I recall, though this may have not been the case, that he just smiled and didn't say a word. After an awkward silence, we said our goodbyes. Needless to say, we didn't win this argument."

Yellen's term at the Fed elevated her profile and caught the attention of the Clinton White House, for which she became chairman of the Council of Economic Advisers in 1997.

She often argued for market-based solutions to political problems. When Clinton's environmental advisers wanted the country to join Europe in setting aggressive pollution-reduction targets, Yellen worried that the move would harm the manufacturing industry and threaten the country's economic progress, according to those involved in the negotiations. Instead, she pushed to establish a system that would allow companies to trade carbon credits — a requirement that nearly doomed the talks. But Yellen held firm with the support of the man who is now her chief rival — Larry Summers, then the deputy Treasury secretary.

"There was no daylight between them," said Stuart Eizenstat, who was an undersecretary at the State Department at the time.

Clinton administration colleagues described Yellen as a thoughtful contributor to debates but said the structure of the job meant she often would be on the losing end of internal arguments. The CEA is meant to provide the president with the best advice the economics profession can offer, even when that advice is politically infeasible. It is instead the National Economic Council, headed then and now by Gene Sperling, that typically weighs economic arguments against political concerns and practical realities.

"It's inevitable, in a sense, that the CEA will not always take the position of other agencies," said Tyson, who served as both CEA and NEC director. "It's just the nature of the deal."

Yellen returned to Berkeley in 1999 and re-entered public service in 2004 as president of the Federal Reserve Bank of San Francisco, just as the housing market in California and other western states was entering a full-scale bubble.

Yellen's economic training made her suspicious early on that the good times could not last, and she directed the bank's research staff to drill deeper into the data: What could happen when teaser interest rates on newfangled mortgages reset? What would become of the piggyback loans many homeowners had taken out on top of their mortgages? How leveraged had Americans become?

"Janet was very much a person who asks very probing questions, wants to understand kind of what's below the conclusions," said John Williams, who was head of research at the San Francisco Fed under Yellen and followed her as president.

So when the leaders of the Fed gathered around their big mahogany table overlooking the National Mall in Washington on Dec. 11, 2007, Yellen was perhaps the gloomiest.

"The possibilities of a credit crunch developing and of the economy slipping into recession seem all too real," she said, reading carefully measured words from a sheet of paper. The "shadow banking system," the complex financial markets that funnel credit to Americans, was freezing up, she said, and the economy was likely to slow significantly.

As it turns out, the Great Recession was beginning that very month.

But while Yellen voiced one of the most prescient diagnoses of the looming crisis, her position on the West Coast left her with little role in sculpting the response. The morning after her remarks, she was back in San Francisco, and the Fed was unveiling a complex set of programs to pump billions of dollars into the global banking system to ease the very freeze-up Yellen had described. They had been engineered by Bernanke's key lieutenants in Washington and New York, who had spent weeks working through technical challenges and delicate international diplomacy to make them happen.

"She was perceptive about the problems in the housing industry, but she did not have a major role in the crisis," said Allan Meltzer, a Carnegie Mellon University professor and leading historian of the Fed.

Yellen also had little background in regulating banks, although her 1,500 employees in San Francisco were charged with the day-to-day supervision of hundreds of banks in the western United States. That soon would become an important part of her job.

"She was very involved, very engaged and very much wanting to be sure that we were well positioned in the event that there was a change in economic circumstances, given that times had been as robust as they were for as long as they were," said Stephen Hoffman, who was the vice president in charge of bank regulation under Yellen in San Francisco and now is a managing director at Promontory Financial Group.

There were dozens of bank failures in the states regulated by the San Francisco Fed from 2008 to 2012 — though the most dramatic failures in the region, those of Washington Mutual and IndyMac, were thrifts that were not regulated by the Fed. Wells Fargo, the largest bank regulated by the San Francisco Fed, weathered the crisis better than other mega-banks, accepting government bailout money grudgingly and repaying it as quickly as possible.

Obama appointed Yellen to become the Fed's vice chairman in 2010, and she quickly took on a different role in that job than that of her two predecessors, Donald Kohn and Roger Ferguson (both now dark-horse candidates for the chairman job, as it happens).

Kohn and Ferguson acted as trusted deputies, helping Bernanke and Greenspan manage the sprawling Fed system and its varied responsibilities. Both Kohn and Ferguson often would meet privately with the chair and help to carry out his priorities: by calling a recalcitrant regional bank president before a policy meeting to push the chairman's preferred monetary policy, by conveying a delicate message to another bank regulator, by solving a personality dispute among the Fed board's staff of 2,000.

Yellen, by contrast, has acted more as an independent force within the institution. She also has avoided representing the Fed in the political fray and has not testified before Congress once in her nearly three years as vice chairman. Kohn testified six times in his last three years in the position.

And Yellen has spent the past three years trying to persuade Bernanke and the rest of the committee to adopt her preferred course for monetary policy, advocating more aggressive steps to pump money into the economy to bring down unemployment.

Traditionally, all seven governors rely on the same staff members for support in conducting research or writing speeches. Yellen, by contrast, built a small group of loyal staffers who work primarily for her, including one economist, Andrew Levin, whom Fed insiders described as functioning for a time as her de facto chief of staff.

Yellen has had an often tense relationship with Daniel Tarullo, the Fed governor who has primary responsibility over bank regulation. Their differences are not so much about policy — both have tended to favor aggressive bank regulation and low interest rates — but instead are personal and stylistic.

"They both have, in their own way, big egos and big personalities," one official who has worked with both said. Tarullo was an Obama campaign adviser and the president's first appointment to the Fed, and he has remained close with former colleagues in the White House.

One thing that hasn't changed from her earlier days as an academic and Fed governor: Yellen always does her homework. Whereas Bernanke comes to the Fed's policy committee meetings eight times a year and speaks extemporaneously from a couple of bullet points, Yellen drafts scripts of exactly what she will say, people who have been in the room said, and reads them word for word.

bc-fed-yellen (TPN)