WASHINGTON – President Barack Obama will nominate Federal Reserve vice chair Janet Yellen to succeed Ben Bernanke as chairman of the nation’s central bank, the White House said Tuesday. Yellen would be the first woman to head the powerful Fed, taking over at a pivotal time for the economy and the banking industry.
Both Yellen and Bernanke are scheduled to appear with Obama at the White House on Wednesday for a formal announcement.
Bernanke will serve until his term ends Jan. 31, completing a remarkable eight-year tenure in which he helped pull the U.S. economy out of the worst financial crisis and recession since the 1930’s.
Under Bernanke’s leadership, the Fed created extraordinary programs after the financial crisis erupted in 2008 that are credited with helping save the U.S. banking system. The Fed lent money to banks after credit markets froze, cut its key short-term interest rate to near zero and bought trillions in bonds to lower long-term borrowing rates.
Yellen, 67, emerged as the leading candidate after Lawrence Summers, a former Treasury secretary whom Obama was thought to favor, withdrew from consideration last month in the face of rising opposition.
A close ally of the chairman, she has been a key architect of the Fed’s efforts under Bernanke to keep interest rates near record lows to support the economy, and she would likely continue steering Fed policy in the same direction as Bernanke.
The White House announcement comes in the midst of a confrontation between Obama and congressional Republicans, particularly those in the House, over the partial government shutdown and the looming breach of the nation’s $16.7 trillion borrowing limit. Obama has been harshly critical of Republicans for demanding either changes in health care or spending policies in exchange for paying for government operations and raising the debt ceiling.
White House aides, however, said Obama was not likely to use Yellen’s nomination announcement for partisan remarks on the shutdown and debt limit.
Mark Zandi, chief economist at Moody’s Analytics, said that the administration probably decided to go ahead with the announcement to send a signal of policy stability to financial markets, where investors are growing increasingly nervous over the partial shutdown and what they perceive as the much bigger threat of a default on Treasury debt if Congress does not raise the borrowing limit.
“Markets are very unsettled and they are likely to become even more unsettled in coming days,” Zandi said. “Providing some clarity around who will be the next Fed chairman should help at least at the margin.”
As vice chair since 2010, Yellen has helped manage both the Fed’s traditional tool of short-term rates and the unconventional programs it launched to help sustain the economy after the financial crisis erupted in 2008. These include the Fed’s monthly bond purchases and its guidance to investors about the likely direction of rates.
Sen. Tim Johnson, D-S.D., who heads the Senate Banking, Housing and Urban Affairs Committee, which must approve Yellen’s nomination, said he will work with the panel’s members to advance her confirmation quickly.
“She has a depth of experience that is second to none, and I have no doubt she will be an excellent Federal Reserve chairman,” Johnson said in a statement.
Sen. Chuck Schumer, D-N.Y., a committee member, called her “an excellent choice” and predicted she would be confirmed by a wide margin.
Obama’s choice of Yellen coincides with a key turning point for the Fed. Within the next several months, the Fed is expected to start slowing the pace of its Treasury and mortgage bond purchases if the economy strengthens. The Fed’s purchases have been intended to keep loan rates low to encourage borrowing and spending.
While economists saw Obama’s choice of Yellen as a strong signal of continuity at the Fed, analysts said the difficult job of unwinding all of the Fed’s support without causing major financial market upheavals would fall to Yellen.
“Yellen is not going to rock the boat in terms of her approach to monetary policy,” said David Jones, chief economist at DMJ Advisors and the author of several books on the Fed. “But it will be her challenge to reverse this prolonged and unprecedented period of monetary ease.”
Yet even after the Fed scales back its bond buying, its policies will remain geared toward keeping borrowing rates low to try to accelerate growth and lower unemployment. The unemployment rate is a still-high 7.3 percent. Few expect the Fed to start raising the short-term rate it controls before 2015 at the earliest.
Yellen had long been considered a logical candidate for the chairmanship in part because of her expertise as an economist, her years as a top bank regulator and her experience in helping manage the Fed’s polices. Her understanding of the financial system is widely respected: Before the crisis struck, she was among a minority of top economists who had warned correctly that subprime mortgages posed a severe threat.
On the Fed, Yellen has built a reputation as a “dove” — someone who is typically more concerned about keeping interest rates low to reduce unemployment than about raising them to avert high inflation. Her nomination could face resistance from congressional critics who argue that the Fed’s low-rate policies have raised the risk of high inflation and might be breeding dangerous bubbles in assets like stocks or real estate.
Republican Sen. Bob Corker of Tennessee, member of the Senate Banking Committee, said he voted against her for vice chair in 2010 because of her dovish policies. “I am not aware of anything that demonstrates her views have changed,” he said.
Still, Yellen has said that when the economy finally begins growing faster and rates will need to be raised to prevent high inflation, she will move in that direction.
Yellen drew outspoken support from Senate Democrats, a third of whom signed a letter this summer urging Obama to choose her. Last month, more than 350 economists signed a letter to Obama urging him to nominate Yellen.
If confirmed by the Senate, Yellen would be the first Democrat chosen to lead the Fed since Paul Volcker was picked by Jimmy Carter in 1979. She would also be the first vice chair of the Fed to ascend to the chairmanship.
Yellen served as a Fed board member for three years in the 1990s before leaving to head the Council of Economic Advisers in the Clinton administration. She also served for six years as president of the Fed’s regional bank in San Francisco before Obama chose her in 2010 for the No. 2 spot on the Fed’s seven-member board in Washington.
Yellen, like Bernanke, was a distinguished college economics professor before joining the Fed. She taught at the University of California at Berkeley from 1980 until 1994 when President Bill Clinton chose her to join the Fed’s board in Washington. She served on the Fed’s board of governors until February 1997, when Clinton chose her to lead the White House Council of Economic Advisers.
Yellen would not only be the first woman to head the U.S. central bank; she also would be the first woman ever to head a major central bank anywhere in the world.
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