Now that current Federal Reserve Vice Chair Janet Yellen has been confirmed to replace Ben Bernanke when he steps down after eight years at the end of the month, it appears she certainly has her work cut out for her.
The last two chairmen certainly knew when to call it quits. After 18 years, Alan Greenspan stepped down in 2006 — right before the toppling of the house of cards that was our economy propped by credit default swaps and easy money policies that made home purchases entirely too easy. The most recent chairman, Ben Bernanke, pulled out every trick in the book to ensure the world’s financial system did not implode. After years of fiscal stimulus, monetary policy expansion — including several quantitative easing programs — and bailouts of key market sectors including banking and the auto industry, it is now time to start winding down. And while Bernanke did some monumental heavy lifting, transferring that awkward amount of weight to the shoulders of Yellen, who will be charged with setting it down gently, will be no small task.
In addition, Yellen will have to contend with increased scrutiny of the Federal Reserve and its policies and overseeing the enactment of the Dodd-Frank regulatory reforms. Depending on your philosophy — free market or Keynesian — that increased scrutiny is either warranted or not. But the fact of the matter is that after years of letting the Fed do whatever it wanted, Congress has taken an interest in its activities. However, how much traction that attention gets is yet to be seen but it’s difficult to see our current Congress agreeing on much of anything — particularly new policy for the complicated and entangled infrastructure that is the Federal Reserve.
But Yellen’s primary task will be to scale back the sheer volume of its stimulus efforts as the stock market is still in a rolling boil. Anyone who knows anything knows there is a danger in such a rolling boil especially if the Fed has had its hand on the knob for about four years. Turn it down to fast and the market will panic and interest rates may rise too quickly. Keep it boiling and inflation and asset bubbles become a risk. Additionally, it is yet to be seen if the market is strong enough on its own to maintain without the Fed’s assistance.
But that is the challenge. And while Yellen was cheered by liberals for her scrutiny of big banks, don’t expect her to do anything but maintain the status quo until the economy is stabilized and unemployment is at least under 7 percent, and maybe even under 6 percent. There are many other factors in play, some are political, some are not, but the Federal Reserve certainly needs a steady hand as it unwinds its years of aggressive monetary policy. Yellen will likely prove to be that steady hand out of necessity.