US Federal Reserve Chair Janet Yellen: A Woman as a Hawk

Conservatives can, at best, end a war; yet, the left is good at containing the sprawling welfare state. The old rule has not always been confirmed by history, but surprisingly often; France’s Charles de Gaulle is an example, Sweden’s social democrats are another. Now a new variation of the rule shall be tested: Doves are the best hawks.

I am talking about Janet Yellen. Since Saturday, the 67-year-old economist rules the U.S. Federal Reserve Bank as Ben Bernanke’s successor and is in this function a powerful, if not even the most powerful, woman in the world. Yellen is believed to be a radical dove; in the Fed banker’s own words, it means that she fears unemployment more than inflation and is therefore prepared to bring lots of money to the people and support economic recovery.

A hawk, on the other hand, is someone who wants to stop inflation above all, partly because he believes that you cannot fight unemployment with cheap money. In this sense, the German federal bank President Jens Weidmann is a hawk, and Yellen’s adversary.

The Ideology of the Federal Reserve Has Not Changed

The thing with the doves and hawks is, in that way, anything but a Glasperlenspiel.* The changing of the guard from Bernanke to Yellen marks a historic turning point. Not that the Fed would change its ideology — Yellen thinks similarly to her predecessors. The caesura is that Bernanke’s policy has reached its limit.

At the onset of the financial crisis in 2007, the Fed reacted aggressively without precedent: It lowered interest much faster than the European Central Bank, printed unbelievable quantities of money — and had success. Bernanke receives historical merit to have prevented a repeat of the Great Depression.

Subsequently, the Fed attempted to force a strong boom, in which state and mortgage bonds were bought in previously unimaginable quantities. The Fed’s balance expanded from $869 million to more than $4 billion. In addition, Bernanke promised that at least until unemployment in the U.S. drops below 6.5 percent, interest rates will not increase. All that — that lots of printed money and the explicit obligation of monetary policy on a labor market target — never appeared in a central bank’s history, at least not during times of peace.

The Way Forward under Yellen Will Not Be Easy

All of those involved operate in uncharted terrain — especially when it comes to the normalization of monetary policy. And the normalization must come now; anything else would be irresponsible. The inflation that Bernanke’s critics have warned against for years has not yet happened. If anything, the inflation is so minor that many already fear the crash into destructive deflation. But eventually, inflation potential will be released. In fact, the Fed began normalization in December with extreme caution: It has not made money scarcer, but merely reduced the speed with which it creates new money.

The Fed’s way forward under Yellen will not be easy. Monetary policy does not only concern money, but also has a lot to do with politics. The Fed does not work in a vacuum, but also in Washington with its dysfunctional political system, and they are dealing with an unsettled public opinion.

The Biggest Risk Is an Overload

Furthermore, monetary policy can draw a lot of unintended consequences. One example is the monetary crisis that broke out in Turkey, Argentina, South Africa and other countries. Its cause lies in the countries themselves, but the crisis was triggered by speculation about higher interest rates in the U.S. The Fed must adjust to such surprises. In that, it could help that Yellen is deemed to be a competent communicator.

The Fed’s biggest risk under Yellen is an overload. Yellen and her counterpart, Mario Draghi from the European Central Bank, are in the headlines because elected politicians have left them alone. Fiscal policy has failed as the second pillar of the crisis management.

Washington is paralyzed by the war between Democrats and Republicans; the position has at least improved in this respect, insofar as after a truce in Congress, the fiscal policy has become a bit more rational. In Europe, the institutional framework and public are missing to support a common, rational fiscal policy. Everything together puts Janet Yellen in the unusual position as a dove that must now prove herself a hawk.

*Translator’s note: A pure academic, theoretical and abstract mind game without a practical application.