Janet Yellen replaces Ben Bernanke as the Chairperson of the Federal Reserve (the Fed) on January 1, 2014, pending her congressional confirmation. Yellen led the Federal Reserve Bank of San Francisco (FRBSF) from 2004-2010 and has held a professorship at U.C. Berkeley since 1985. She is currently the Vice Chair of the Fed.
Yellen was one of the first Fed economists to predict the collapse of the housing bubble and financial crisis. Since then, she has remained in step with current Fed Chair Bernanke’s policies. As Fed Chair, Yellen plans to continue Bernanke’s monetary stimulus, resulting in a favorable reception amongst liberal ideologues and Wall Street champions.
Yellen helmed the San Francisco Fed during the height of the subprime mortgage crisis and ensuing bumpy plateau recovery. However, despite her reputation as a “liberal” economist, Yellen did little to curb the lending abuses that occurred during the Millennium Boom.
Some of her policy stances include:
- a liberal view of inflation with a generous annual target of 2% to 2.5% as a way to combat unemployment;
- a regulated financial market, as markets (and people) do not act rationally;
- economic stimulus as a tool for job growth; and
- transparency of Fed actions.
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Yellen’s time in San Francisco is the best news out of this appointment. She and her husband, George A. Akerlof, fellow U.C. Berkeley economics professor and collaborator of Nobel winner Robert J. Shiller, have a long-standing stake in California’s markets. Further, Yellen knows just how significant California’s economy is to the U.S. (and the global community), as it boasts the ninth largest economy in the world.
Like her predecessor, Yellen understands a fundamental truth about macroeconomics: a modicum of inflation is a good thing for the labor market. As inflation increases, wages are devalued. This in turn allows firms to hire more workers, thus encouraging job creation in the private sector.
Of course, this job creation comes at the expense of income stagnation for the middle class. More jobs exist, but everyone earns a little less until wages increase.
The eventual outcome of employment and wages in California directly correlates to the future of our housing market. On one hand, we know increased employment will lead to greater home sales volume. But stagnant wages will place downward pressure on prices.
Which do you prefer: more closings per year or larger fees per closing? Does it make a difference?
On a national scale, the most promising stance from Yellen is simply her commitment to transparency.
Remember the mortgage rate spike in June 2013? The rate spike can be directly tied to the Fed’s lack of transparency. Bond market investors became convinced the Fed was cutting its stimulus program. In response to this phantom cut, the bond market raised its bond rates. This rise in turn pushed mortgage rates way beyond what is needed to maintain a steady housing recovery. And the rub? The Fed did not plan on cutting its stimulus and in fact released a statement affirming its plan to continue pumping money.
Will Yellen’s ties to California and her commitment to jobs and transparency help our housing recovery? It’s too early to say, but this change definitely has potential.
Re: Yellen’s Path from Liberal Theorist to Fed Voice for Jobs from The New York Times and How would Janet Yellen balance jobs, inflation as Fed chief? from The Los Angeles Times