The Yellen promise

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SummaryBut for emerging markets, the solutions begin at home

But for emerging markets, the solutions begin at home

Santayana’s dictum that “those who cannot remember the past are condemned to repeat it” may not quite apply to US Federal Reserve chairmen, who are assigned to repeating the past only after having studied it in great depth. Ben Bernanke, a scholar of the Great Depression of the 1930s, had to preside over the Great Recession of recent times. Now, his putative successor, Janet Yellen, a student of efficiency wage models, inherits an American economy grappling with 7.3 per cent unemployment. What I particularly like about Yellen, though, is that besides her careful study of the past — unlike most fellow economists — she is quite an ace on the future. Yellen was the topper out of 14 Fed policymakers in predictions made in speeches and congressional testimony between 2009 and 2012, according to an analysis done by the Wall Street Journal. All in all, President Barack Obama appears to have made a safe choice, and a good one, even though he was dragged kicking and screaming to this point.

Understandably, the buzz about Yellen in the US is mostly positive. Much has been made about her “dovish” tendencies: she prefers easy monetary policies to stimulate growth and employment, which is generally good news for a country that craves both. She represents continuity and can reliably build consensus because of her insider track record. This is welcome at a time when discontinuities and shutdowns are in abundance, and consensus is very much of a rarity in Washington. Her gender makes her another rarity in economics and high finance. In the meantime, with Congress, the federal government and fiscal policy held hostage by the extreme right-wing of the Republican party, a credible and trustworthy face to the Fed takes on even more significance.

In fact, the audience for Yellen’s actions and words extends beyond the borders of the US. The Fed serves a much larger audience today, that is, the wider global economy. In recent months, concerns about the US tapering its $85 billion programme to buy treasury and mortgage-backed securities have been creating havoc in emerging markets across the board. Hot money was exiting from markets such as India and Brazil, chasing higher returns in the US. While the dreaded taper has been put off, the widespread anticipation is that Yellen will be predisposed towards preserving the easy money policy as long as

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