A New Head for the Fed

As new Fed chair, Janet Yellen will be talking to Congress a lot more. Photo by Alex Wong/Getty Images.

It’s official: The Senate confirmed Janet Yellen as the next Federal Reserve Chairman. She’ll take the helm when Ben Bernanke departs this month, and it seems everyone has ideas about where the oldest new Fed head ever will steer monetary policy. In our view, though, speculation is a fool’s errand. Whether it’s Yellen, Bernanke or any of the 12 individuals voting at each Fed meeting, trying to guess what’s fluttering through their heads is fruitless. Some think Yellen’s past statements and pet peeves preview which course she’ll steer, but Fed heads frequently defy expectations once in office. You can’t game Fed moves—human decisions aren’t market functions. Investors must wait and judge actions—and in the meantime, we suggest tuning out the chirping.

It’s a simple human truth: People say one thing and do another. All the time! Fed heads included. Former chairman (and renowned quipster) William McChesney Martin once tried to explain this away, claiming that when you become Fed chief, you take a pill making you forget everything you ever knew, and it lasts as long as you’re in office. Your resume might suggest you should know better than to mismanage the monetary system, but you got amnesia. His successor, Arthur Burns, tried the same trick when raked over the coals for 1970s monetary policy decisions, telling critics he took “Martin’s little pill.” Now, are all Fed heads really drugged out amnesiacs? No. (We think.) But they certainly defy expectations based solely on their backgrounds.

Take Bernanke, heralded as an expert on the Great Depression when he took office in 2006. Conventional wisdom said he’d know how to steer the US through a crisis and away from deflation. Except, during 2008, Bernanke didn’t fulfill either of the Fed’s core functions—serving as lender of last resort or boosting liquidity—terribly well. He tried, creating numerous new swap lines and public-private investment partnerships (and so on) as more and more firms took writedowns and credit markets seized. But he skipped the tried and true, like dropping the discount rate below the Fed Funds rate, which would have let banks borrow cheaply from the Fed and lend to each other at slightly higher rates—an incentive to move more money through the system. Then, when trying to battle deflationary conditions, he jumped straight to quantitative easing (QE) and continued it for years after the panic was gone, a deliberate flattening of the yield curve—something the Fed has long held as deflationary (and rightfully so).

We’d suggest folks bear Bernanke’s record in mind as they wade through all the commentary saying Yellen’s byline on a Nobel Prizewinning paper, long-running infatuation with the Non-Accelerated Inflation Rate of Unemployment or passionate statements about income inequality mean X, Y or Z for the future of QE, short-term interest rates or other Fed functions. Pundits tried parsing every line from her confirmation hearing for hidden meaning or agenda, but confirmation hearings are political noise. The goal is to win politicians’ votes, and Fed candidates are extraordinarily good at saying what certain Senators want to hear.

There is an extraordinary amount of chatter, but none of it tells you anything concrete. Some say her three years as Vice Chair mean she’s a “relief pitcher” coming in to finish Bernanke’s QE project, or a dove who will push for more bond buying at the first sign of economic sluggishness—but maybe she’s really just a hawk who wanted to build bank balance sheets! Others believe her primary focus will be improving unemployment, her cause celebre as Vice Chair, and she’ll try to keep policy ultra-loose until we see “appropriate” progress in employment getting closer to its “maximum level.” Maybe that will indeed be her goal! But she’s just one person. While the Fed head can influence the conversation, 12 people vote on monetary policy changes. Twelve people with often competing views, assessments and pet peeves. Twelve unpredictable human minds.

One thing we do know: The Yellen Fed will soon start making decisions, issuing statements and building a track record. Then, we’ll have something tangible to weigh. Until then, however, we’d suggest not wasting energy on guesswork.