Sept. 18 (Bloomberg) -- Janet Yellen, the top candidate to succeed Ben S. Bernanke as chairman of the Federal Reserve, has won praise from labor leaders, and with good reason: she has put the battle against unemployment front and center at the Fed.
Last month, AFL-CIO President Richard Trumka said Yellen, the Fed vice chairman, would be a “better choice” than former Treasury Secretary Larry Summers, who dropped out of contention this week.
Yellen fought for more than a decade to put combating joblessness on equal ground with controlling inflation at the core of Fed policy. Now, her confidence in government’s ability to smooth over the ruts of market economies has become the prevailing view at the Fed under Bernanke, the most activist U.S. central bank chief in its 100-year history.
“Yellen has elevated the importance of the labor market as the pulse of the economy and focus of policy discussion in the post-crisis period,” said Ward McCarthy, chief financial economist at Jefferies LLC in New York and a former Richmond Fed economist. “She has extended Bernanke’s view that policy needs to be accommodative for a long period of time in a post-crisis environment.”
Yellen has backed Bernanke’s efforts to boost the economy through three rounds of asset purchases that have swelled the Fed’s balance sheet to $3.66 trillion. Fed policy makers meeting today are forecast to start curtailing purchases as unemployment declines, while also stressing that so-called tapering isn’t tantamount to tightening monetary policy. Yellen, who heads a Fed subcommittee on communications, has championed transparency and clearer messaging.
STILL ACCOMMODATIVE
Policy makers will reinforce “that they’re going to keep interest rates low for a long period of time, policy is still accommodative and don’t get fixated on tapering,” said Robert Eisenbeis, chief monetary economist at Cumberland Advisors in Sarasota, Florida.
Yields on the benchmark 10-year Treasury note climbed as high as 2.999 percent Sept. 5 from 1.93 percent on May 21, the day before Bernanke said the central bank could “take a step down in our pace of purchases” in the “next few meetings.” The Federal Open Market Committee will reduce its purchases of bonds to $80 billion a month from $85 billion at its meeting today, according to a Bloomberg News survey of economists.
Ten-year yields fell three basis points this week to 2.85 percent yesterday on speculation that the Fed under a Yellen chairmanship would likely hold short-term rates lower for longer than it would have under Summers.
SUMMERS WITHDRAWAL
Yellen, a 67-year-old former professor at the University of California, Berkeley, is President Barack Obama’s top candidate to lead the central bank after Summers, Obama’s former economic adviser, removed his name from consideration, according to people familiar with the process.
Yellen would be the first woman to lead the U.S. central bank.
“She seems to be a better candidate,” AFL-CIO’s Trumka, leader of the nation’s biggest labor federation, said in an Aug. 29 interview for Bloomberg Television’s “Political Capital” with Al Hunt.
Trumka said he stressed to Obama his preference for a Fed chairman who emphasizes job creation.
“Fed chiefs in the past that have only looked to their inflation-fighting mandate to the exclusion of their full- employment mandate, have cost this country and cost American workers,” Trumka said.
EXTENDED UNEMPLOYMENT
In a Feb. 11 speech at a conference sponsored by the AFL- CIO, the federation of 57 labor unions with 12 million members, Yellen spoke of the hardships endured by people out of work for extended periods or whose wages have failed to keep pace with the cost of living. She also said creating jobs should be “center stage” as the Fed begins to wind down its policies to stimulate the economy.
Yellen’s writings and speeches show confidence in government’s ability to offset calamities, especially in labor markets. In 2004, as president of the San Francisco Fed, she argued in a paper written with her Nobel Prize-winning husband, George Akerlof, that central bankers couldn’t ignore the costs of long-term joblessness.
“Policy makers should be compelled to take action given the serious costs of long-term unemployment when overall unemployment is already high,” they wrote. “A week of unemployment is worse when it is experienced as part of a longer spell.”
The proportion of the unemployed who have been out of workforce 27 weeks or longer was 37.9 percent of the total last month, compared with a record 45.3 percent in March 2011 and 17.4 percent when the recession began in December 2007.
RESEARCH PAPERS
Yellen and her husband together wrote around a dozen papers on the labor market. Their most-cited work, according to the website Research Papers in Economics that tracks citations, demonstrated that whether workers believe they are paid fairly influences their efforts on the job and even helps explain the national unemployment rate.
“There was a rip-roaring debate during the time we were at Berkeley -- in a way it continues to this day -- about the nature of unemployment and what can be done to address it,” Yellen said in an interview in September 2012.
She became president of the San Francisco Fed in June 2004 and vice chairman of the Washington-based Board of Governors in October 2010.
YELLEN’S INFLUENCE
“Yellen has been influential in raising the focus on unemployment on the FOMC,” said Jonathan Wright, an economics professor at Johns Hopkins University in Baltimore who worked at the Fed’s division of monetary affairs from 2004 until 2008. “I could see a Yellen chairmanship being particularly attuned to the risk that having high cyclical unemployment lasting for too long will eventually become structural.”
Policy makers have pledged they won’t consider raising the federal funds rate, now near zero, as long as unemployment is 6.5 percent or higher and the outlook for inflation doesn’t top 2.5 percent, half a percentage point above the Fed’s 2 percent inflation target. In July, they discussed lowering the unemployment threshold before any decision on raising borrowing costs, according to minutes of the meeting.
The impact of Yellen’s work is reflected in those thresholds, said Tim Duy, an economist at the University of Oregon in Eugene who formerly worked at the U.S. Treasury.
TOUGH TRADE-OFFS
Almost two decades ago, Yellen said that policy makers should allow inflation to overshoot the target during periods of high unemployment. “When the goals conflict and it comes to calling for tough trade-offs, to me, a wise and humane policy is occasionally to let inflation rise even when inflation is running above target,” she said during a debate on inflation targeting in 1995.
The inflation threshold “makes clear that the Fed is willing to tolerate inflation temporarily above the long-term target as part of a policy that accelerates improvement in the labor market,” Duy said. “Essentially, small deviations in inflation from target are less costly than large deviations in unemployment.”
Unemployment fell to 7.3 percent in August as workers left the labor force and payrolls in the U.S. climbed less than forecast. The share of working-age people in the labor force declined to 63.2 percent, the lowest participation rate since 1978, from 63.4 percent.
Yellen said April 16 in her most recent speech on monetary policy that she favors holding the benchmark interest rate “lower for longer” and that “a major challenge for the Federal Reserve and many other central banks has been how to address persistently high unemployment when the policy rate is at or near the effective lower bound.” The Fed has held its benchmark interest rate near zero since December 2008.
“She has signaled she is particularly dissatisfied -- rightly so -- and sees the labor market as an urgent problem,” said Jesse Rothstein, a former chief economist at the Labor Department who now teaches at Berkeley and whose research has been cited by Yellen. “There are big costs to waiting” to take action.
--With assistance from Joshua Zumbrun, Jeanna Smialek and Craig Torres in Washington. Editors: Mark Rohner, Chris Wellisz
To contact the reporters on this story: Caroline Salas Gage in New York at csalas1@bloomberg.net; Steve Matthews in Atlanta at smatthews@bloomberg.net
To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net
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