WASHINGTON – After a lengthy and politically charged search, President Barack Obama has decided to nominate Janet Yellen, the Federal Reserve’s vice chair, to be chairman of the powerful U.S. central bank, succeeding Ben Bernanke at a pivotal time for the economy and the Fed’s monetary policies.
If confirmed by the Senate, Yellen would be the first woman to head a major central bank anywhere in the world — at a time when France’s Christine Lagarde heads the International Monetary Fund.
Yellen also would be the first Democrat chosen to lead the Fed since Paul Volcker was picked by President Jimmy Carter in 1979.
Obama was scheduled to make the announcement Wednesday with Yellen and Bernanke at his side in the White House’s ornate East Room.
Bernanke, 59, will serve until his term ends Jan. 31, completing a remarkable eight-year tenure in which he helped pull the U.S. economy out of the worst financial crisis and recession since the 1930s.
Under Bernanke’s leadership, the Fed created extraordinary programs after the financial crisis erupted in 2008 that are credited with helping save the U.S. banking system. The Fed lent money to banks after credit markets froze, cut its key short-term interest rate to near zero and bought trillions in bonds to lower long-term borrowing rates.
Yellen, 67, emerged as the top candidate after Lawrence Summers, a former Treasury secretary and White House favourite for the job, withdrew from consideration last month in the face of rising opposition.
A close ally of the chairman, Yellen has been a key architect of the Fed’s efforts under Bernanke to keep interest rates near record lows to support the economy, and she likely would continue steering Fed policy in the same direction as Bernanke.
Her nomination could face resistance from congressional critics who argue that the Fed’s low-rate policies have raised the risk of high inflation and might be breeding dangerous bubbles in assets like stocks or real estate.
Democratic Sen. Tim Johnson, who heads the Senate Banking Committee, which must approve Yellen’s nomination, said he would work with the panel’s members to advance her confirmation quickly.
“She has a depth of experience that is second to none, and I have no doubt she will be an excellent Federal Reserve chairman,” Johnson said in a statement.
The White House announcement comes in the midst of a confrontation between Obama and congressional Republicans, particularly those in the House of Representatives, over the partial government shutdown and the looming decision on increasing the nation’s $16.7 trillion borrowing limit. Obama has been harshly critical of Republicans for demanding either changes in health care or spending policies in exchange for paying for government operations and raising the debt ceiling.
Mark Zandi, chief economist at Moody’s Analytics, said the administration probably decided to go ahead with the announcement to send a signal of policy stability to financial markets where investors are growing increasingly nervous over the shutdown and the possibility of default.
“Markets are very unsettled and they are likely to become even more unsettled in coming days,” Zandi said. “Providing some clarity around who will be the next Fed chairman should help at least at the margin.”
The search for a successor to Bernanke grew unusually public when Summers and Yellen emerged as the top two contenders. Through August and into September, Yellen and Summers themselves kept a low profile but their warring camps waged a fight that stirred up Congress, spawned opinion columns and letters from Congress, and triggered commentary from notables both inside and outside the economics profession.
Yellen drew outspoken support from Senate Democrats, a third of whom signed a letter this summer urging Obama to choose her. This month, more than 350 economists signed a letter to Obama urging him to nominate Yellen.
Obama’s choice of Yellen coincides with a key turning point for the Fed. Within the next several months, the Fed is expected to start slowing the pace of its Treasury and mortgage bond purchases if the economy strengthens. The Fed’s purchases have been intended to keep loan rates low to encourage borrowing and spending.
While economists saw Obama’s choice of Yellen as a strong signal of continuity at the Fed, analysts said the difficult job of unwinding all of the Fed’s support without causing major financial market upheavals would fall to Yellen.
“Yellen is not going to rock the boat in terms of her approach to monetary policy,” said David Jones, chief economist at DMJ Advisors. “But it will be her challenge to reverse this prolonged and unprecedented period of monetary ease.”
Yet even after the Fed scales back its bond buying, its policies will remain geared toward keeping borrowing rates low to try to accelerate growth and lower unemployment. The national unemployment rate is a still-high 7.3 per cent. Few expect the Fed to start raising the short-term rate it controls before 2015 at the earliest.
At the Fed, Yellen has built a reputation as a “dove” — someone who is typically more concerned about keeping interest rates low to reduce unemployment than about raising them to avert high inflation.
Sen. Bob Corker, a Republican member of the Senate Banking Committee, said he voted against her for vice chair in 2010 because of her dovish policies. “I am not aware of anything that demonstrates her views have changed,” he said.
Still, Yellen has said that when the economy finally begins growing faster and rates will need to be raised to prevent high inflation, she will move in that direction.