On Thursday the Senate conducted the most important confirmation hearing of the Obama administration. The hearing involved the confirmation of Janet Yellen, the President’s nominee to take over for Ben Bernanke as the next Chairman of the Federal Reserve Bank.
Yellen is a highly accomplished economist with a clear philosophical record and her appointment, which is expected to confirmed, will have an impact on every American, so it behooves us all too explore what this change could mean.
When the Fed’s current Chairman Ben Bernanke was confirmed, it was remarked the new chairman was a student of, and had written considerably on, the Great Depression. While this factoid didn’t resonate much in 2006, it was Bernanke’s intimate understanding of the Depression era that has clearly guided Federal Reserve policy since the 2008 financial crisis and onset of the Great Recession. In effect, knowing something about the man ended up providing important clues to the Fed’s policy decisions during his chairmanship.
So Yellen is going to be very important to us, what do we know about her?
In Janet Yellen’s writings, she is more comfortable with inflation than has been acknowledged by previous fed chairs. She has surmised that inflation is linked strongly and inversely to unemployment. She does not believe an economy with high unemployment is likely to experience inflation. She believes inflation can actually be a good thing.
She is also a subscriber to the Keynesian school of economics. Keynesian economists theorize the federal government and central bank (Fed) can and should attempt to influence and even manage the private economy for purposes of creating financial stability and societal prosperity. Keynesians believe in fiscal tools such as government deficit spending during recessions and monetary tools such as aggressive interest rate policies.
It’s not so important to discern whether you agree with these philosophies, but rather how these economic theories could impact your financial plan and investments.
The Federal Reserve is credited by many with returning financial stability to our nation during the financial crisis. The central bank’s reputation as the “adults in the room” has emboldened the Fed into taking an ever growing role in the functioning of our economy and markets. With a Federal government ham-stringed by partisan incompetence and a burdensome national debt, it is reasonable to assume the Fed will continue to play an oversized role in our financial lives.
Fed policies are primarily directed at influencing the interest rate markets through tools focused on both the banking system and the bond market. With Yellen’s comfort level with potential inflation and desire to use Fed policies to promote greater societal prosperity, some writing may be on the wall. Don't hold your breath for higher rates on those bank accounts.