As we all know by now, Ben Bernanke is gone. He was focused on not having a depression on his watch so he pulled out all kinds of never-before-tried policy tools. Consequently, Janet Yellen will have to cope with the unintended consequences of QE — namely big unrealized losses in the Fed’s bond portfolio.
Recently, I had the privilege to sit down with Bluford Putnam, Managing Director and Chief Economist, of our partner, CME Group, to discuss how the Fed under Yellen will be different from Bernanke’s Fed.
Although Yellen is also a strong advocate for the traditional Fed culture, which balances inflation and employment goals, she is likely to move to a more “hawkish” position if inflation pressures were to rise unexpectedly, at least from her point of view. Given her specialty in the labor markets, she is likely to focus in much greater detail in all areas of the labor markets, not just headline unemployment but also duration of unemployment, turnover of jobs and part-time employment. She wants to see who got fired versus who left their job voluntarily since a voluntary move may reflect confidence to secure another job, possibly indicating greater market confidence. By evaluating the numbers in greater depth than the prior Fed, Yellen will use her insight into the labor markets as the starting point to forecast inflation. While she doesn’t want inflation more than anyone else, her way may be different of finding the indication.
Another key difference in the New Fed is the addition of the new Vice-Chair, Stanley Fischer. He is the former head of the Israeli Central Bank, a former MIT Professor (Bernanke studied under Fischer), and brings an international view that has been missing at the Fed since Robert Heller retired from the board 20 years ago. The policy implications for the US dollar and other currencies and central banks may get some much needed attention that has been absent for decades.
When Bernanke adopted QE, he made the asset size of the Fed’s balance sheet huge so its importance to the economy and to politicians has increased dramatically. Possibly as a result of that, the second confirmation vote in the Senate (2010) had more dissents than any previous vote. That trend followed through to Yellen. According to Putnam, The Fed Chair is going to be a very divisive appointment in Jan-2018 when Yellen terms is up. On the way, as members of the Board of Governors leave their posts, each new appointment may face greater political scrutiny and polarization in the US Senate.