What A Yellen Chairmanship Means For Credit Unions
It is being widely reported today that President Obama will nominate Fed Vice Chairman Janet Yellen to be the first Chairwoman of the Federal Reserve replacing Ben Bernanke, whose term ends on January 31, 2014. Here are some pretty safe assumptions.
First, Yellen’s nomination process will be highly politicized. With the ever present threat of a filibuster of the nomination and the relatively moderate Republican members of the Senate Banking Committee looking to burnish their conservative bona fides either during or in the aftermath of the government shut down debate, look for Yellen to be caricatured as a Trotskyite in disguise by Conservatives who is anxious to maximize employment without regard to inflation and the Joan of Arc of financial reform by liberals on the opposite end of the divide anxious to suggest that any criticism of her is reflective of nothing more than the latent misogyny of the old boys network. In truth, of course, Janet Yellen is no radical. However, there have been certain themes that she has consistently championed that provide clues as to how the Chairmanship may affect credit unions in the months and years to come.
Most importantly, she is the foremost advocate other than the Chairman himself of the Fed’s bond buying program. For instance, in a February 11, 2013 speech, she bluntly responded to critics who suggested that the Fed’s bond-buying programs do too little to foster economic growth to justify their continuation stating “I believe the Federal Reserve asset purchases and other unconventional policy actions have helped, and are continuing to help, fill the gap and shore up aggregate demand.”
Secondly, one of the themes of the Bernanke Chairmanship has been a move toward greater transparency in the hopes of getting markets to respond more uniformly to the Fed’s policy directions. Although the downside of this policy was on full display recently as mortgage rates skyrocketed in response to a belief that the Fed would soon be reducing its bond buying purchases only to have the Board unexpectedly stay the course, don’t expect a Chairman Yellen to back away from this ship called transparency. In fact, it is fair to say that she was not simply an advocate of this policy, but one of its architects.
The Fed has a dual mandate to foster both stable prices and employment. Perhaps the most distinctive element of Yellen’s ascendancy to the Fed’s Chairmanship is that she emphasizes more than other Fed governors the importance of the preeminence that increasing employment should play. Simply put, she doesn’t see inflation as a risk any time soon, and feels that the unemployment rate is masking the true extent of the plight facing the American worker. As she explained in a March 4, 2013 speech, while the unemployment rate is an important indicator of future economic growth, “the unemployment rate has its limitations” as an indication of economic growth. “As I noted before, the unemployment rate may decline for several reasons other than improved labor demand, such as when workers become discouraged and drop out of the labor force.”
At the end of the day, I strongly suspect that a Yellen Chairmanship will be substantially similar, at least in the short term, to Bernanke’s. To understand Chairman Bernanke you have to understand that as a student of the Great Depression, he believes that the single greatest contribution of the Fed in a time of economic crisis is to ensure adequate liquidity in the market. Janet Yellen comes from a Keynesian school that believes that government could and should do more to foster employment. While they both have vastly different perspectives, they reach the same conclusion. This is no time to be raising interest rates or discouraging private investment. This is good news for future economic growth, but bad news for credit unions anxious to see higher yields on their investments.