Janet Yellen is slated to become the most powerful woman in the world as she assumes the Chair of the Federal Reserve in January. Investors should be familiar with her tendencies – and mindful of her colleague’s concerns.
Larry Summers, August’s front-runner to succeed Ben Bernanke as the Federal Reserve Chairman, sent President Obama a short letter last weekend. In it he volunteered that the process of his eventual Congressional confirmation would be “acrimonious,”¹ code for a long-shot no longer worthy of the President’s political capital.
Summers’ formal recognition of an impending Congressional stonewall quickly shifted the odds for the next Fed Chair to current Vice-Chair Janet Yellen, as posted by online gambling site Paddy Powers – for those inclined to wager on such an event. Be careful before poking fun at those gambling wonks though. Global stock, bond, currency and precious metals markets suggest plenty of investors were quick to change their bets as well.
The field has undoubtedly changed. Gone is the potential successor who once uttered the simply blasphemous suggestion that quantitative easing had become “inefficacious.” And presumably gone too is the current tongue-tied Chairman who may have concocted the market’s drug of choice but now confuses investors with shifting talk of both further accommodation and imminent tapering.
Welcome Janet Yellen to certainly the most scrutinized and arguably the most powerful position in the world. The 67 year old is a white-haired monetary dove, a moniker suggestive of an inclination for being soft on inflation. Perhaps her reputation has been earned (or at least reinforced) thanks to a history of voting alongside Chairman Bernanke in prescribing QE1, QE2, Operation Twist and QE3+ to address the economy’s stubborn ills. Additionally, the Ph.D. economist from Yale is on record advocating the Fed’s “highly accommodative” policy well “after the economy recovers.² By all (yet admittedly limited) indications, a Yellen-led Federal Reserve signals continued Fed accommodation and potentially a green light to the now four year old “risk on” trade.
Before investors parlay their winning trade from Paddy Powers to a dramatic reallocation of their 401(k) though, the only other female voting member of the Fed deserves a listen. Since her appointment in to the voting committee in January, Kansas City’s Fed Governor Esther George has an unblemished record casting dissenting votes in opposition to the monetary policy administered by Bernanke and Yellen.
The roots of George’s dissension were well-summarized in her April speech.
“I support an accommodative stance of monetary policy while the economy recovers and unemployment remains high. But I view the current policies as overly accommodative, causing distortions and posing risks to financial stability and long-term inflation expectations with the potential to compromise future growth.”³ More specifically, George has voiced concern that a zero interest rate policy has led investors to pursue increasingly aggressive alternatives in a “reach for yield.” Anecdotally this appears obvious. A frustration with low returns has led investors to overlook, if not simply neglect risk in a continual search for higher returns. “Experience,” George warns “has shown that pushing risk taking too far can cause the misplacing of risk, the misallocation of capital and the ultimate weakening of financial firms’ balance sheets.”4
Bulls are giddy by Summers’ withdrawal and hopeful that the mere formality of Obama’s nomination and a Congressional confirmation will anoint a money-printing dove to the central bank’s top post. The prudent investor recognizes the likely implications of Janet Yellen’s leadership at the Fed but tempers blind euphoria with a more critical eye for risk and an attentive ear for Esther George’s well-spoken reservations.
1- Wall Street Journal, “Summers withdraws name for Fed Chairmanship” Web 16 Sept 2013
2- Yellen, Janet, “Challenges Confronting Monetary Policy” Web 4 March 2013 http://www.federalreserve.gov/newsevents/speech/yellen20130302a.htm
3- George, Esther, “Central Bank Patience” Web 4 April 2013
4- Wall Street Journal Blog, “New KC Fed Chief Esther George Sounds Hawkish Note, Warning of Farmland Bubble” Web 10 Jan 2012 http://blogs.wsj.com/marketbeat/2012/01/10/new-kc-fed-chief-esther-george-sounds-hawkish-note-warning-of-farmland-bubble/