Yellen tipped to replace Bernanke as Fed chairman

In July 1996, the Federal Reserve broke the metronomic routine of its closed-door policy-making meetings to hold an unusual debate. The Fed?s powerful chairman, Alan Greenspan, saw a chance for the first time in decades to drive annual inflation all the way down to zero, achieving the price stability he had long regarded as the central bank?s primary mission.

But Janet L Yellen, then a relatively new and little-known Fed governor, talked Greenspan to a standstill that day, arguing that a little inflation was a good thing. She marshalled academic research that showed it would reduce the depth and frequency of recessions, articulating a view that has prevailed at the Fed. And as the Fed?s vice-chairwoman since 2010, Yellen has played a leading role in cementing the central bank?s commitment to keep prices rising about 2% each year.

Yellen is now widely viewed as a logical candidate to succeed the current Fed chairman, Ben S Bernanke, when his term ends in January 2014. She has worked closely with him in shaping and building support for the Fed?s campaign to stimulate the economy and bring down unemployment.

But some of Yellen?s critics remain wary. They worry that she would not be sufficiently concerned about the possibility that inflation will accelerate as the economic recovery gains strength. If nominated, she could face opposition from senate Republicans who have repeatedly expressed concern that the Fed?s campaign would destabilise financial markets and make controlling the pace of inflation more difficult.

?I think people read Janet Yellen?s speeches as saying that she puts a higher weight on joblessness compared to inflation? than the typical member of the Fed?s policy-making committee, said Vincent Reinhart, formerly the head of the Fed?s monetary policy staff and now the chief United States economist at Morgan Stanley. ?And that includes Ben Bernanke.? He added, however, that her nomination would be unlikely to shake financial markets because she already exercises considerable influence, so any shift in policy would most likely be modest.

Moreover, Yellen?s personal qualities, highlighted by the 1996 episode, have helped her win supporters even among her ideological opponents.

?She makes an argument on the merits and she sticks with it,? said Alan Blinder, an economics professor at Princeton nominated to the Fed alongside Yellen in 1994. ?And she?s good at articulating an argument in a way that doesn?t leave people on the other side hopping mad at her.?

Despite their disagreement at the time, Greenspan said that he continued to hold Yellen in high regard. ?I did listen to her more carefully because she articulates her position in a way that you can follow it analytically,? he said in an interview. ?Intuitions are useless. Janet?s conversation and her presentations were factually based, and that always got my attention.?

If confirmed, Yellen would become the first woman to lead a major central bank. She is 66, seven years older than Mr. Bernanke. She would be 71 by the end of a four-year term as chairwoman. But she remains in good health, and friends say that, like other prominent women of her generation, she regards herself as being in the prime of a late-blooming career. Nor would she be the oldest person to lead the Fed. Greenspan began his fifth and final term in 2004 at 78.

Yellen, slight, white-haired and described by one colleague as a ?small lady with a large IQ,? does not loom like Paul Volcker nor cut like Greenspan. Her personal style more closely resembles Bernanke?s soft-spoken manner. The force of her arguments can catch people by surprise.

Kevin Hassett, a staff economist at the Fed when Yellen arrived in 1994, recalled that she started to eat lunch regularly in the staff cafeteria to subvert the hierarchical system that limited communication between Fed governors and the vast army of research economists. Other governors had tried to change the rules but Yellen, he said, found a way around them. ?It showed a kind of grace and wisdom that is very unusual in Washington,? said Hassett, now a fellow at the right-leaning American Enterprise Institute.

Hassett is among those who worry that Yellen does not place a sufficient emphasis on controlling inflation. ?But I hold her in the highest possible regard,? he said. If the Obama administration is ?going to pick a Fed chair that thinks the way they do, then Janet Yellen would be the best possible choice.?

There has been no official word from the White House or Bernanke that the Fed will have a new chairman next year. The decision is up to Obama, and aides say he has not yet focused on who he wants in the job.

But Bernanke may have signalled his departure last week when the Fed announced that he planned to skip an annual summer conference in Jackson Hole, Wyoming. The Fed?s chairman has attended the event in each of the previous 25 years. People who have spoken with Bernanke say he is tired after leading the Fed through eight years that were mostly consumed by crisis. Bernanke has also sought to make monetary policy more transparent and predictable, dispelling the image of the Fed chairman as a kind of artiste. ?I don?t think that I?m the only person in the world who can manage the exit? from the Fed?s current policies, he said last month. The only way to prove that point would be to let someone else do it.

Obama, for his part, has the opportunity to nominate the first Democrat to lead the Federal Reserve since president Carter chose Volcker in 1979 ? and the person he selects will serve a term that extends two years beyond his own.

Yellen has avoided questions about her future, but she, too, appeared to address the subject indirectly this month. Asked about the dearth of female economic policy makers, she responded that it was ?something we?re going to see increase over time, and it?s time for that to happen.? She declined a request to be interviewed for this article.

There are other potential candidates for the job, including Roger W Ferguson Jr and Professor Blinder, both former Fed officials.