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Insight into the Fed chair selection

By Mark Hamrick ·
Wednesday, October 9, 2013
Posted: 4 pm ET

So what does all this talk about nominating Janet Yellen as Federal Reserve chair really mean? And what's the historical significance of it all?

In looking for someone to discuss these topics with, we turned to Diane Swonk, the chief economist at Mesirow Financial. She has served on several advisory committees to the Federal Reserve Board, its regional banks and the Council of Economic Advisers for the White House. Most recently, she served two consecutive terms on the Congressional Budget Office's panel of economic advisers. She is author of the book, "The Passionate Economist: Finding the Power and Humanity Behind the Numbers" and frequently blogs on Mesirow Financial's Economic Minds blog. Here are her reactions to the likely nomination.


Diane Swonk of Mesirow Financial

On the nomination itself

The Yellen announcement is a welcome lifeboat of certainty in an ocean of uncertainty. Also, as serendipity would have it, it is one of the few things that can get through Washington today. The Senate Banking Committee approves the Fed chairman; the pump on her confirmation in there and approval by the Senate has already been primed.

How will Fed's monetary policy change?

In terms of monetary policy, she was the favored choice of financial markets and represents continuity at the Fed. Look for more clarity and emphasis on communications given her roll chairing the communication committee, which included two extremes of views among the Fed presidents.

The Fed has already begun to extend its 'forward guidance' -- the length of time that the Fed intends to hold the (federal) funds rate near zero by saying the 6.5 percent threshold on unemployment is not a hard target.

Indeed, the Fed will leave the punch bowl out long enough for a few to get tipsy and wait to raise rates until after unemployment falls below 6.5 percent. I don't think they would mind if it meant a little (2.5 percent) inflation. Yellen, however, is not as much a dove as a pragmatist. She was one of the people to convince former Chairman Alan Greenspan to adopt an implicit inflation target, and was in favor of the Fed making that target explicit more recently. I don't think she gets enough credit for that.

How will Yellen rule?

Separately, it is important to note that we won't really know her management style until she takes office. There really isn't any job quite comparable to that of the Fed chair. It requires an ability to foster debate, but not necessarily dissent within the Fed, and diplomacy with Congress. She is known for her ability to get people to change their minds on policy with her grasp of the facts and research, without them realizing that she disagreed with them. That said, Fed chairs tend to carry a big stick; some do it quietly, others are more aggressive.

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