Janet Yellen: The Transparency of Intelligence

The Federal Reserve is more effective than the European Central Bank because it links price stabilization with employment. Janet Yellen’s clarity contrasts with Mario Draghi’s banality and his confusing statements.

Beginning on Feb. 1, a woman will lead the Federal Reserve for the first time in its history. At face value, this fact is cause for celebration, as it indicates another crack in the glass ceiling. Although the crack may be imperceptible, reality consistently shows us that it is there. However, the more important cause for celebration is the person who has been named: Janet Yellen, a woman of enormous intellect, who has held high-level positions in public service.

In January, the U.S. Senate ratified Yellen’s appointment, despite the objections of two-thirds of Republican senators, who disliked her inclination to continue the monetary stimulus until the economy can be shored up sufficiently. Not alone among the members of the Fed who share her position, Yellen’s views on this point are very clear. Her self-identity comes from the clarity of her ideas and the explicit, reasoned manner in which she expresses them using simple language. Her points are substantiated, and her assertions are based on academic research or decisions that are grounded in political economic theory.

The current financial and economic crisis presupposes that monetary policy faces challenges when it is a stand-alone policy. Linked to external affairs, fiscal policy is more inward looking and focused exclusively on reducing public debt. However, monetary policy should have a dual role regarding economic demand and financial stability. This situation is not an easy one for central banks, monetary authorities or financial supervisors. We need to recognize that the Fed has been more effective than the European Central Bank. The latter’s limited objective is price stabilization, while the former links price stability and employment objectives. Regarding monetary instruments, the Fed took the initiative to introduce quantitative easing, as well as so-called “forward guidance,” based on the stance of monetary policy expected to prevail in the future, and the ECB followed with both measures.

In several speeches that point to the use of various indicators to evaluate the current situation and that offer a cost-benefit analysis of monetary policy, Janet Yellen has expressed her position as to the current priority objective. She has been very clear about the duration of the measures and how to define the timing of their conclusion. She has stated that employment is the priority because, even though the unemployment rate has dropped to 6.7 percent, we are still a long way from the long-term rate of equilibrium — 5.2 percent to 6 percent — and from the rate that prevailed before the crisis. She has also indicated the importance of calculating both the number of people who have given up seeking employment, as they represent a decrease in the active job-seeking population, as well as the people who have part-time jobs but would like to be working full time. If these and other similar conditions are considered, the rate of underemployment would be above 14 percent, a level that is not only bad for the families who suffer; there is also a social cost because of the decline in the economy’s future potential productivity. With signs that the employment situation will improve further, she believes that it is acceptable to allow the rate of inflation to change slightly — by half a percentage point — above its 2 percent rate, which is the objective of stability.

With respect to the instruments used, Yellen explained that her decision is to maintain the exceptionally low interest rates on federal funds until mid-2015. The quantitative easing measures will be the first to be graduated, allowing for an increase in liquidity, while giving the recovery sufficient time to become strong enough to begin eliminating injections of liquidity. In 2011, the Fed had already defined its exit strategy principles. Yellen’s words make her a clear manifestation of what “forward guidance” should mean: a clear statement of the objectives and, by using specific indicators, how and when monetary policy is expected to respond. In this way, over the coming years, economic actors — banks, individuals, etc. — can formulate their own expectations regarding financial conditions, which encourages the accomplishment of targets, thereby increasing the efficacy of monetary policy.

Yellen’s clear words contrast with those of both past and present central bank representatives. One specific example is the press conference given on Jan. 9, 2014 by ECB President Mario Draghi. Evaluating the current state of affairs, he expressed his hope that it would be possible to contain prices. He also noted that the risks in the economic outlook for the eurozone would remain low; to emphasize the firmness of his forward guidance, he indicated that decisions will be made as necessary and that several instruments are available, the choice of which depends on what happens, given that some are more appropriate for events in monetary markets, while others deal better with a deteriorating situation over the medium term. And, finally, he noted that all of the instruments are approved in the treaty and, thus, the Board of Governors of the ECB could choose any of them: nothing clear and everything obvious.

Lying ahead for Yellen is the challenge of guiding monetary policy during the transition toward normalcy, analyzing the indicators for greater employment and monitoring the risks of generating an increased appetite for risk-taking. It seems she lacks neither the capacity for good judgment nor good communication.

María Nieves García Santos is an economist.