Janet Yellen Is Bernanke V2.0

Now that the Senate has confirmed Janet Yellen to be the next Federal Reserve Chairman, many are wondering what to expect from the Central Bank's first woman leader. The answer is more of the same.

Yellen has been Vice Chair of the Federal Reserve since October 2010, which means that she has been intimately involved in crafting monetary policy with Ben Bernanke. While Yellen was not involved with the first round of quantitative easing, which was launched in December 2008, rounds 2 and 3 occurred during her watch.

Not surprisingly, Yellen has been a staunch defender of the Fed's monetary policy, which she told Congress had “made a meaningful contribution to economic growth and improving the outlook.” Like her predecessor Ben Bernanke, Yellen has emphasized that as the economy and the employment market heals, the Fed will slowly reduce its purchases of bonds. At the December FOMC meeting, the central bank announced that as of January, it would reduce its monthly bond purchases by $10 billion.

Many critics of the current Fed policy maintain that its largest contribution has not been its stated purpose of spurring economic growth, but to the soaring stock market. The Federal Reserve’s low interest rate and bond buying program made stocks the go-to asset class for investors, pushing indexes up about 30 percent last year. During her Congressional testimony in November, Senator Bob Corker (R-TN), asked Yellen about whether she believed the current Fed policies were creating asset bubbles. At that time, she said that there was little evidence of a bubble-like environment “that threatens financial stability."

However, she also made clear that she thinks "it is important for the Fed, hard as it is, to attempt to detect asset bubbles when they are forming” and that the central bank could let the air out of the bubble by employing regulatory measures, like restricting leverage, and, if necessary, it could raise interest rates. Whether or not Yellen and her team of Fed officials could (a) identify a bubble and (b) have the guts to pop it, are unknowable.

As far as the culture that Janet Yellen might bring to the Fed, chances are she will follow Bernanke's footsteps on that front as well. Bernanke has made transparency, communication and consensus-building a priority during his chairmanship. According to former Fed Governor Laurence Meyer, Yellen “Will be in the Bernanke mold.” Despite her impressive resume, Yellen's stylistic attributes are likely what won over Democratic lawmakers, who urged President Obama to choose her over former Treasury Secretary Lawrence Summers.

There is no doubt that Yellen has her work cut out: she must unravel a $4 trillion Fed balance sheet, without causing an economic slowdown; a market panic or a speculative mania. Let's hope that she is up to the task!

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