What do Investment Bankers Think of Janet Yellen?

In the past month, a number of articles have focused on Janet Yellen, supposedly the frontrunner for Ben Bernanke’s job as Chairman of the Federal Reserve when he retires at the end of this year . The question here is: what do the people closest to the Federal Reserve – investment bankers – think of Janet Yellen as the potential head of the Federal Reserve?

From what’s out there, there appears to be two general camps (and no, gender has nothing to do with whether Janet Yellen would be an appropriate choice as the next head of the Federal Reserve, despite what some seem to believe):

  1. There are those individuals that want a bureaucratic insider who will likely advocate policy actions very similar to what has happened under Bernanke’s leadership.  Individuals from this camp generally don’t want disruptive change and like the idea of “promoting from within.”
  2. On the other hand are those individuals and insiders that want fresh thinking from the outside (meaning not from Bernanke’s inner circle).  In their view, a better potential nominee would be someone from the competitive side of the banking industry as opposed to the administrative side.  Individuals from this camp generally think the Federal Reserve’s past few year’s of pushing against the string has been ineffective and sets poor precedent.

With this brief background in mind, here are some more details on a potential Janet Yellen pick and some alternatives.

Janet Yellen started her career out as an Assistant Professor at Harvard University from 1971 to 1976, after which she spent a couple of years on the faculty of the London School of Economics and Political Science from 1978 to 1980.  After her initial academic years, Dr. Yellen moved west to Berkeley, where she worked until 1994 to join the Board of Governors of the Federal Reserve. In 1997 she left the Federal Reserve to become chair of the Council of Economic Advisers until 1999.  Since then, Dr. Yellen has worked for the Federal Reserve system, currently serving as Vice Chair of the Board of Governors of the Federal Reserve system and simultaneously serving as a board member, due to expire on January 31, 2024.

During Dr. Yellen’s career, she has passionately written on topics related to income inequality, monetary policy, and unemployment.  Judging by her writings and past speeches, most in-the-know investment bankers consider Dr. Yellen to be a “dove”, meaning she is likely to be weak on inflation.  The fact that Dr. Yellen is likely to be weak on inflation is a major concern for investment bankers looking for fresh and new monetary policy actions, especially given the heightened likelihood of higher than anticipated inflation. Essentially, at a time when increased inflation has a possibility of being a major factor in economic growth, an appointment of Janet Yellen as head of the Federal Reserve makes it less likely that actions to counter inflation will be taken in a reasonable time frame.

For those individuals wanting fresh, new thinking on monetary policy, investment bankers (and the economy at large?) may want to look to others within the Federal Reserve system, such as Alan Blinder, William Poole, Donald Kohn, and Stanley Fischer, as well as well-known outsiders like Treasury Secretary Jack Lew, former Chairmen Lawrence Summers and Timothy Geithner, and Roger Ferguson.  Interestingly, very few of the mentioned candidates come from the competitive side of the banking industry of which the Federal Reserve is supposed to regulate.

Within this group of investment bankers wanting a different direction than the Ben Bernanke era, some may be more interested in having a chairman from a corporate background as opposed to an economics or finance background. According to this camp, it’s been over 30 years since a corporate manager has led the Federal Reserve (George Miller was the last corporate leader to head the Federal Reserve, acting as chairman from 1979 to 1981) and the industry may benefit from a corporate leader now more than ever.

That said, Janet Yellen appears to be the frontrunner for the job as head of the Federal Reserve, although the Obama administration will likely think carefully about what it wants from the Federal Reserve over the next four years before it acts on naming Bernanke’s replacement.

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