The choice for Ben Bernanke’s replacement as the next Chair of the Federal Reserve seems, in DC’s conventional wisdom, to have come down to Janet Yellen (Bernanke’s current deputy) or Larry Summers (a former official in both the Clinton and Obama administrations, including a stint as Treasury Secretary).
For those who think that the U.S. economy remains too weak and needs as much policy support as it can get, this seems like a pretty good choice. Both Summers and Yellen have consistently argued in the past couple of years that the primary problem facing the U.S. economy currently is slack demand.
I’d argue, however, that Yellen is the clearly correct choice for the job right now.
For one, she has been far ahead of the policymakers’ curve when it comes to diagnosing macroeconomic trouble. Recently released minutes from Federal Reserve Open Market Committee meetings in December 2007 show that Yellen was nearly alone in warning that a recession was imminent—a warning that proved correct.
For another, it’s hard to imagine somebody more qualified and better-groomed for the job. She has served as Chair of the White House’s Council of Economic Advisers, has had previous stints on the Fed’s Board of Governors, has run the San Francisco Federal Reserve, and has been Vice-Chair of the Federal Reserve since 2010.
Most importantly, however, is that the Fed is the linchpin for financial regulation in the U.S. economy. Yellen has clearly shown that she has learned valuable lessons from the housing bubble-led Great Recession—reversing her earlier adherence to the near-consensus view that central banks should not pre-emptively burst asset market bubbles, because the bar for meddling in (presumably efficient) financial markets should be set very high and “cleaning up” after bubbles would never be that hard. She now acknowledges that this was too facile an approach to bubbles. Changing one’s position based on new facts—particularly when it involves pushing back against powerful sectors like finance—is admirable and sadly rare for policymakers. It should be rewarded.