Last week, the U.S. Senate confirmed the appointment of Janet Yellen as the next chairman of the Federal Reserve. Yellen will be the first woman to chair “the Fed” when she takes over on February 1.
The announcement of Yellen’s ascension into one of the most powerful economic policy roles in the world may be little more than interesting trivia for most Americans. But given the Federal Reserve chairman’s responsibility in shepherding the recovering U.S. economy out of the recent recession, her policies will have far-reaching effects on financial matters that will surely impact us all.
So, what do we know about Janet Yellen? How do the notoriously finicky financial markets feel about her chairmanship? What’s her strategy for improving the economy?
What Is the Federal Reserve?
Before we get into Janet Yellen, let’s recap exactly what the Federal Reserve is and does.
Put simply, the Federal Reserve is the central bank of the United States. The Fed’s main goal is to ensure stability in our country’s financial system by preventing panics, managing risk and regulating banking institutions.
The Federal Reserve is a partnership between the U.S. government and private sector banks. Banking representatives from the private sector are elected to the executive boards of the 12 Federal Reserve banks scattered across the country. These experts advise the Federal Reserve on the economic health of the country and the Fed uses that information to make policy decisions. These decisions include the raising and lowering of interest rates and the adoption of new regulation for the banking sector.
Yellen as Chairman
Janet Yellen is no stranger to the Federal Reserve System. She holds a doctorate in economics from Yale University and also served as outgoing chairman Ben Bernanke’s second-in-command for four years. Previous posts include president of the San Francisco Federal Reserve Bank, a member of the Fed’s Board of Governors, and head of the Council of Economic Advisors.
It is believed that Yellen’s “apprenticeship” under outgoing Fed chair Ben Bernanke will heavily influence her own term at the helm of the nation’s economy. Here are some of the major issues facing the U.S. economy as she transitions into her new role.
Interest Rates: To Raise or Not to Raise?
The key Federal Funds interest rate has been hovering around 0.25% since 2009 in an effort to help the economy during the recent downturn. This interest rate is a critical component of determining how much banks and lending institutions charge to loan money to consumers.
As a result, money has been virtually free for banks to borrow. With the economy on the mend, pressure is mounting to begin raising interest rates to their pre-downturn levels to prevent inflation.
Is the economy ready? How will the financial markets react to higher interest rates? How will more expensive borrowing costs impact consumers? These are all questions that will weigh on Yellen as she and the Federal Reserve push the right buttons to keep the economic recovery on track.
Easing Up on Quantitative Easing
While “quantitative easing” sounds like something out of a science fiction novel, it’s actually just a fancy term for a government program to pump more money into the economy. Like the name suggests, it’s complicated. But the gist of it is that the seemingly limitless resources of the Federal Reserve are used to purchase bonds from financial institutions in an effort to pump more money into the economy.
Janet Yellen was a strong defender of the expensive quantitative easing program during her Senate confirmation hearings. But as economic conditions improve, the Federal Reserve is likely to continue scaling back its $85 million per month bond buying program. As is the case with low interest rates, banks have gotten used to “free money.”
How quickly the Fed tapers this program is not just an economic issue, but a political one as well.
Back to Work
Unemployment is an issue that has plagued the country since the beginning of the economic downturn. Addressing the unemployment issue will be at the top of Yellen’s agenda when she takes over.
As an academic, Yellen spent a great deal of time on the subject of unemployment. Several economic experts believe that this is Yellen’s bread-and-butter issue, which makes her an ideal candidate to take over the Federal Reserve.
What do you think are the biggest economic issues facing the country? What advice would you give Janet Yellen as she takes over the Federal Reserve? Tell us what you think in the comments!
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