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.
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.
Special Report: Janet Yellen tapped for Fed Chair
Janet Yellen is in line to be the next Federal Reserve Chair. How could this change at the top affect your money?
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MarkHamrick: From Bankrate.com, this is "Special Report: Janet Yellen nominated for Fed chair." Hello. I'm Mark Hamrick, Bankrate Washington bureau chief. The end of one era and the beginning of another is at hand. President Barack Obama has decided that the current vice chair of the Federal Reserve, Janet Yellen, should have the top job. Ben Bernanke's term ends in January. His tenure has been most dramatically marked by the most serious financial crisis and recession since the Great Depression.
PresidentBarackObama: When faced with potential global economic meltdown, he has displayed tremendous courage and creativity. He took bold action that was needed to avert another depression, helping us stop the free fall, stabilize financial markets, shore up our banks, get credit flowing again. And all this has made a profound difference in the lives of millions of Americans.
Hamrick: Here to help break all of this down is Bankrate's senior financial analyst, Greg McBride. Greg, how will we remember Ben Bernanke?
GregMcBride: Well, I think for the time being he does deserve credit for averting something far worse in the financial crisis of 2008. We were literally staring at the abyss into a potential depression, and Bernanke steered us clear of that. However, his legacy is not going to be complete, I think, for many years to come, simply because all of this liquidity that he's created has to be mopped up before the book can be written on his legacy. Much like they don't call Alan Greenspan "the maestro" anymore like they did when he was the Fed chairman, I don't think the book on Bernanke is going to be closed until we do or don't know whether there's been any collateral damage from all this liquidity that the Fed under Bernanke has created.
Hamrick: And that very point, Greg, has been made by people who wanted to make the case that Bernanke should have been able to stay on or should stay on beyond the end of his term so that he could kind of manage all that since in a way he started it, right?
McBride: I just don't think he wanted to. Yeah, you'd love to have that continuity, but frankly, I think Bernanke's got a lot of other more lucrative options at his disposal now. I think he's going to be giving a lot of speeches for a pretty penny, doing a lot of consulting and probably not working weekends like he has for much of the last seven years.
Obama: But I also want to announce my choice for the next chair of the Federal Reserve, one of the nation's foremost economists and policymakers, the current vice chairman, Janet Yellen.
JanetYellen: If confirmed by the Senate, I pledge to do my utmost to keep that trust and meet the great responsibilities that Congress has entrusted to the Federal Reserve: to promote maximum employment, stable prices, and a strong and stable financial system.
Hamrick: Greg, the biggest headline about Janet Yellen really has been that she'd be the first female Fed chief. It is a powerful position, so that is historic and important, and I believe she'd be the 15th chair, which stretches over a century. She's coming in presuming that we avoid the severe impact of breaching the debt ceiling where the Fed has been hoping to stop asset purchases aimed at priming the economy. Why is that such a challenge at this point?
McBride: Well, we have an economy that's stuck in first gear. It's a slow growth economy with high unemployment and low inflation. And deciding exactly when and how quickly to remove that stimulus and dial it back is going to be a very difficult job -- one that you have to walk the fine line. You don't want to pull back too much too soon and have the economy stumble. But at the same token, if you go too slow, you run the risk of much higher inflation down the road.
Hamrick: So if the lesson of Ben Bernanke's chairmanship is that we really don't know what's going to happen over the following chair's term, based on what we know, is her management of the stimulus that's been put in place and the sort of exiting of that strategy, do we think that's the biggest challenge she's facing?
McBride: Very clearly. She's been a big proponent of the stimulus that we've seen. But the flip side of that coin is, is she going to be willing to remove it when necessary and deal with the negative consequences and negative feedback that come with it? That includes sitting in front of Congress a couple of times a year and having to justify or explain why the Fed is doing what the Fed is doing.
Hamrick: And of course, President Obama made the point that the next Fed chair will be working with another president. Obviously, we don't know who that will be, and we certainly don't know what Congress is going to look like. So the political landscape has yet to present itself.
Yellen: Too many Americans still can't find a job and worry how they'll pay their bills and provide for their families. The Federal Reserve can help if it does its job effectively.
Hamrick: Greg, Janet Yellen does signal that she's willing to make battling unemployment a continued top priority for the Fed, which is also supposed to, of course, guard against inflation. Is that very unusual, in your estimation, that unemployment is something that the Fed is targeting?
McBride: No, not really, simply when you consider that's part of that dual mandate -- that dual mandate being maximum employment and price stability. Right now, inflation is very low. Unemployment is very high. I think it's more than just lip service that they're giving to the focus on unemployment. But look: The Fed can't create jobs. All they can do is help create conditions that are favorable to job growth. And I think what you're hearing from Janet Yellen is that: a pledge that she's going to continue to make sure the conditions are favorable to job growth.
Hamrick: So the irony is, one of the ironies here, is that the person who didn't get the nomination, former Treasury Secretary Larry Summers, who served under President (Bill) Clinton in that capacity, had expressed some concerns about what the Fed's been doing. How much of a problem is it, or how much of a problem is she going to have, attacking unemployment and building consensus as she looks to lead her Fed colleagues?
McBride: I think that's where one of the advantages of having Yellen take over for Bernanke is that you have a lot of continuity. She's been closely involved with and a big proponent of all of the stimulus we've seen to this point. She's basically been Bernanke's co-pilot. So I think it's really easy from a continuity standpoint for her to move over into the big chair and take the reins of the Fed come Feb. 1, assuming that she's confirmed, with minimal disruption. I think at least at the outset, you're going to have a very difficult time discerning the Yellen-led Fed from the Bernanke-led Fed, and I think that's by design. You want that continuity, that seamless transition, particularly as we move from a time when the Fed is doing everything they can to stimulate the economy to one where they have to dial that back at some pace.
Hamrick: I've thought about that, Greg, if you use a football analogy here, they kind of have a no-huddle offense right now, and it would be really tough to go to the ground game if she's the quarterback given the fact that's the playbook they've been running.
McBride: Yeah. Or it's kind of tough to change quarterbacks when you're doing the no-huddle offense. And I think that at least she's on the field already. It's pretty difficult to bring somebody else off the sidelines and into the game without missing a beat when the consequences of doing so are pretty significant.
Yellen: The Fed's effectiveness depends on the commitment, ingenuity and integrity of the Fed's staff and my fellow policymakers.
Hamrick: Interesting choice of words there, particularly I thought "ingenuity and integrity." And since the Great Recession, or the financial crisis, the Fed has been doing all kinds of things that it hasn't done before -- buying Treasury bonds and mortgage-backed securities. So exiting that pattern really may take some creativity. Greg, what do you think that means for people's wallets and purses?
McBride: Well, the Fed has had to take a lot of creative steps, and we're really in uncharted waters, no doubt about it. I think those uncharted waters extend to the things that Yellen is going to have to do when it comes time to start removing stimulus and liquidity from the system. I think when that happens, financial markets are not going to like it. We're going to see increased volatility, particularly on those 401(k) statements. We will see higher interest rates, particularly on the long end of the curve, so things like fixed mortgage rates will move higher once the Fed starts to dial back that stimulus. But we're still probably a couple of years away from the Fed having to boost short-term interest rates. So things like credit cards, home equity lines of credit and a lot of adjustable-rate mortgages, you have, I think, some more time in the sun where you can really pay down that debt without the worry of higher interest rates materializing.
Hamrick: Greg, Yellen would make the point that her so-called critics who refer to her as being dovish or perhaps more willing to allow inflation at a level that might be unacceptable to other people. She would say, "Well, look, I've been right. Inflation has not been an issue so far." But is it your opinion that in terms of what investors should look at, and that includes people who are obviously exposed to fixed-income positions, that inflation could end up being more aggressive when it does show up?
McBride: It very well could. And we are going to find out if Janet Yellen is excessively dovish or if she's got the backbone to start pulling away liquidity when inflation starts to show up. And I think from an investor's standpoint, this is why you have a diversified portfolio geared for the long haul. Even though inflation is low now, there are plenty of ways to hedge against the potential for higher inflation down the road, particularly when you consider that the Fed tends to be behind the curve, not ahead of it, when it comes to inflation.
Hamrick: My Bankrate colleague, Greg McBride. Greg, thanks.
McBride: Thank you, Mark.
Hamrick: You've been listening to Special Report from Bankrate. Our editor-in-chief is Julie Bandy; editor is Jessica Patel; and thanks to producer Lucas Wysocki for his work in the studio.
For more on the Federal Reserve and other issues relating to personal finance, visit Bankrate.com, and you can follow us on Twitter @Bankrate. You can also catch our regular podcast, Your Money This Week, via our website and on iTunes. I'm Mark Hamrick. Thank you for listening.