Janet Yellen is the Best Choice to Replace Ben Bernanke


It is less than one year until Ben Bernanke's term as chairperson of the Federal Reserve is up, and already speculation abounds at his successor. This Friday saw Bob Janjuah, strategist for Nomura Group, launch a broadside at Janet Yellen, the current Federal Reserve vice-chairman and likely successor to Bernanke. Janjuah said on CNBC that "A client said to me a few weeks ago that if Karl Marx was in charge of the world, he'd have Janet Yellen as his central bank governor."

Ignoring the absurdity of a central banker being a Marxist, Janjuah was probably referring to the fact that Yellen is seen by many to be an inflationary "dove"; i.e. more concerned about unemployment then inflation. But in light of recent economic news and the overall state of the economy, she clearly is the best choice to replace Bernanke if he decides to step down.

Although many demagogue about some kind of hyperinflation that is "just around the corner," a look at current policy and current trends rates has inflation at 2.0%. This is exactly what the Federal Open Market Committee inflation target is, as they made clear in a recent press release.

Meanwhile job growth was dismal in March, with only 88,000 jobs being added. The unemployment rate dropped to 7.6% but that was only due to people dropping out of the labor market, which does not count for official unemployment statistics. Job losses in the wake of the Great Recession have not recovered, having an extended lag time that has been unmatched when compared to post-World War II recessions.

Given few inflationary pressures, high unemployment, and a lack of clear fiscal policy from Capitol Hill, Yellen makes the most sense to replace Bernanke. The idea that she is the biggest inflationary dove since Marriner Eccles, the Mormon banker F.D.R. appointed during the depths of the Great Depression, is absurd considering past statements she has made, which show that she is more hawkish on inflation than most give her credit for. Even when it comes to the Quantitative Easing program, she has come out in favor of altering the pace of security purchases based on changes to the economic outlook.

There is one other less-understood but equally important reason that Yellen should succed Bernanke. Under Bernanke, the Federal Reserve has become more communicative and open then it was in the past. Yellen recently gave a speech on this topic and noted that"

"Recently I used the word "revolution" to describe the change from "never explain" to the current embrace of transparency in the FOMC's communication ... The revolution in the FOMC's communication, however, isn't about technology or speed. It's a revolution in our understanding of how communication can influence the effectiveness of monetary policy."

This is important because by eliminating uncertainty in actions that the Federal Reserve will take, the private sector can react accordingly allowing for monetary policy to be more effective. For example, if firms know that the Federal Reserve will not end Quantitative Easing until there is a large uptick in employment the private sector can plan accordingly. Yellen is likely to continue the more communicative policy that Bernanke started at the Federal Reserve.

Overall Yellen represents the best guiding hand for the Federal Reserve absent of any miraculous economic recovery and exceptional job growth. She may be an inflationary "Jdove," but that is exactly what we need.