The Yellen Federal Reserve will be substantially different than the Bernanke Fed. For one thing, Ms. Yellen is a Democrat, the first Democrat, as many people have stated, appointed as Chairman of the Board of Governors of the Federal Reserve since Paul Volcker.
Now, right out of the gate, one must be careful how one takes this. Paul Volcker was a Democrat but he was also the person who said that the single most important price in the economy is the price of the country's currency in the foreign exchange market. Paul Volcker is the only Fed chairman since the value of the dollar was floated in August of 1971, who, during his tenure, saw the value of the dollar rise against other currencies. (For more on this last point see my Seeking Alpha post.)
Ms. Yellen, on the other hand, is "a student of unemployment and how to fight it…." She has "years of policy experience," and is "surely the right woman to tackle a sluggish recovery." These quotes are from Robin Harding in the Financial Times. A look at much of Ms. Yellen's academic work along with many of her speeches and other writings, leads one to agree with the Wall Street Journal article that labels her as an "unreconstructed Keynesian."
I don't object to this…if Larry Summers had been appointed to the position…he, too, is from the Keynesian camp. The President is a Democrat and has the right to appoint a Democrat with Keynesian leanings as the new Chair of the Board of Governors. Regardless of who was appointed, one cannot criticize Mr. Obama for choosing someone with a Keynesian leaning.
Mr. Reagan and Mr. Bush (43) appointed Republicans to this position and see where it got us.
Even the Wall Street Journal editorial mentioned above argues that Mr. Bernanke "contributed greatly to creating the bubble and panic" that resulted in the financial collapse and subsequent Great Recession.
As far as Mr. Bernanke's response to this collapse and what followed, we should have been a little more aware of how he might respond to such a situation. The Wall Street Journal article states that Mr. Bernanke's "academic roots are as a monetarist, and he justifies his policy mainly in those terms."
And, how should a Monetarist react to a financial collapse and a Great Recession? Milton Friedman, the dean of Monetarists, stated that the Great Depression was as severe as it was because the Federal Reserve did not act aggressively enough to stop the downturn. Mr. Bernanke's major thrust during the collapse, therefore, was to throw as much "stuff" against the wall as he could in order to see what might stick. Not only did we see this approach right after the financial trouble began, but we have seen the effort extended through three applications of quantitative easing. In this respect, Mr. Bernanke has been true to his teacher.
Ms. Yellen's teacher was James Tobin, the Yale economist that influenced many young economists from the 1950s through the 1970s. Through most of her professional career, Yellen has been a supporter of the modern Keynesian approach to economic policy and regulation.
She claims that she is supportive of both of the Federal Reserve's goals…supporting higher levels of employment and lower rates of inflation…but, we shall see after she takes the seat of Chairwoman. And, I think the difference will come out in terms of her understanding of markets and her pragmatism.
Where Ms. Yellen differs from Mr. Bernanke is in terms of understanding markets…especially understanding financial markets. In my analysis of Mr. Bernanke's tenure, I believe that he was basically "tone deaf" when it came to understanding markets. I believe that this contributed to the Fed's policy that brought on, as the Wall Street Journal article stated "the bubble and panic" that resulted in the financial collapse and the Great Recession. I also believe that his lack of understanding of markets contributed to his miserable failure to communicate the policies of the Federal Reserve to financial markets and financial market participants, although he tried and tried to be open and transparent during his tenure.
I believe that the Yellen Fed, as New York Times writer Catherine Rampell states will be "Precise and Predictable." And, in her being "precise and predictable" I believe that she will be able to transmit her message more effectively because she has a better feel for the financial markets and how they operate.
This was what was so good about Paul Volker and…going back further…William McChesney Martin. They had experience with markets and they were able to incorporate this experience, not only into the construction of policy, but also translate that policy to the investing community in a way that appropriate expectations could be built up.
I believe that Ms. Yellen will be a substantial improvement over Mr. Bernanke in this regard.
As far as monetary policy is concerned, I don't see Ms. Yellen as one who will vary much, if at all, from the main overarching philosophy of economic policy of the Federal Reserve and the federal government over the past fifty-some years. Yes, over much of this period, the heads of the Federal Reserve and the US Treasury Department and other government agencies have stated that they supported the goals of high employment, low inflation, and, almost all of them said that they favored a strong value of the dollar in foreign exchange markets.
When push came to shove, however, only one of these goals really matters to those in positions of power in the government, and that was the goal of high levels of employment. Why is this the goal that almost everyone defaults to? It is because politicians see that this is the primary way to get elected…and to get re-elected.
And, this fact was captured when President Richard Nixon confessed that "We are all Keynesians now!" I would argue that the effort to achieve high levels of employment drove all administrations from the early 1960s on, and credit inflation was the primary way to achieve this.
Even the supply-side president Ronald Reagan had Arthur Laffer as a major advisor and Laffer, underneath, was a Keynesian. He just believed that tax cuts were more important than more government spending.
So, I look for Federal Reserve operations under Chairwoman Yellen to be more like that of the years before the 2000s and I expect that there will be fewer "surprises." She will not be creating any "Great Experiment" like Mr. Bernanke did. I believe that she will "taper" the Fed's current bond purchasing program in a systematic and steady manner. And, she will explain in that way.
As far as investment within this environment is concerned, one must work with the fact that the Fed will err on the side of creating more credit than needed. Here is where one must focus, on the markets that are targeted and where the emphasis is placed…where the bubbles might pop up. This is what I have tried to do over the past three years or so and it is what I will be doing going forward. One doesn't fight the Fed…but, one has to know where the flow is going.
The exception to look out for? There are a lot of funds floating around in the United States…and the world. Right now, these funds seem to be desired by commercial banks in order to stay in operation. If this situation changes and banks start to lend these excess funds, we could have a real burst of inflation. And, I don't believe, in such a state, even a magician can remove all of these funds fast enough to control the inflation. But, that is just another "picture" right now.