Larry Summers is out for Federal Reserve chairman. That probably means Janet Yellen is in.
There are two reasons why one might think Yellen wouldn’t be named to the Federal Reserve. One is that President Barack Obama or his key advisers think she would do a bad job. The other is that the White House feels that nominating her would be a dangerous capitulation — it would show they could be pushed around by liberal Democrats.
But the line from the White House has never been that Yellen is a bad choice. In fact, they’ve been at pains to say she’s absolutely terrific — an incredible candidate who they’d be thrilled to name if there wasn’t, remarkably, an even more incredible candidate in Summers.
As for the idea that it would be bad “optics” to shatter a glass ceiling and appoint the insanely qualified, widely respected vice chair of the Fed — that’s the kind of Washington nuttiness this White House typically prides itself in being above.
The case against Summers has been overblown. He’s both much more concerned with the poor and middle class, and much less interested in deregulation, than his critics gave him credit for. The White House favored him, in part, because they thought he’d be more effective at fighting unemployment and regulating Wall Street than Yellen. Their progressive critics, of course, disagreed.
But amid the heated back-and-forth over Summers, the strength of the case for Yellen has been obscured. At times, she’s been made out to be an anybody-but-Summers candidate. She’s not. Here are five reasons why.
1. She’d be the most qualified Fed chair in memory. Ben Bernanke had three years on the Fed’s Board of Governors when he was named chairman. Paul Volcker had four years leading the Federal Reserve Bank of New York before he got the call. Alan Greenspan had never worked at the Fed at all.
On sheer Fed experience, Yellen blows them out of the water. She led the Federal Reserve Bank of San Francisco from 2004 to 2010 and has been vice chair of the Fed since then. So she’s served across multiple chairmen, in multiple positions, during good economic times and during the depths of the financial crisis. Experience isn’t everything, of course, but it matters — particularly when the Fed is in such uncharted waters.
2. She got the big calls right. The Fed’s job, put simply, is to predict the path of the economy and put in place the right policies to keep employment high and inflation low. In 2006 and 2007 — and, frankly, in 2010 and 2011 — the Fed got that basic job of prediction wrong. It didn’t see the financial crisis coming, and it didn’t see the slow recovery.
Yellen was an exception. If you go back to the Fed’s December 2007 transcripts — the most recent we have — you’ll find the Fed predicting that the economy would avoid recession. You’ll also find Yellen voicing a prescient note of pessimism. “The possibilities of a credit crunch developing and of the economy slipping into a recession seem all too real,” she warned. In ensuing years, Yellen pushed for the Fed to do more to combat an employment problem that she didn’t see abating — advice that Bernanke and the rest of the Federal Open Market Committee eventually followed when their optimistic forecasts proved terribly wrong.