Numerous media outlets are reporting that President Obama has chosen Janet Yellen, the president of the San Francisco Federal Reserve Bank, as his pick to replace retiring Donald Kohn, the long-serving vice-chairman of the central bank.
The Wall Street Journal's headline trumpets the news that Yellen "has been a strong supporter of Bernanke's policies to fight the deep economic downturn." That's true, insofar as it refers to Bernanke's dramatic efforts to extend credit to all and sundry once it became clear just how severe the economic crisis really was. But it's also misleading. In the parlance of Fed taxonomy, Yellen is considered a "dove" -- which means she is predisposed to make unemployment a bigger priority than fighting inflation. She has consistently warned against the danger of short-circuiting economic recovery by tightening monetary policy too quickly.
A review of the historical record also shows that she took a more negative view of the economy than Bernanke in the runup to the Great Recession. Back in 2006, when Alan Greenspan was opining that the worst was over in the housing sector, she was warning that the worst was yet to come. She was right.
Obama has been getting some flak for not moving more quickly to fill three current vacancies on the Federal Reserve Board. But the Journal also reports that the administration has settled on two other nominees, and may introduce them together as a package deal.
Taken together, (and provided Obama's nominees make it through the Senate confirmation process,) the administration's choices could be hugely influential going forward. No matter what kind of financial regulatory reform finally emerges from Congress, the inclinations and predispositions of the actual human beings serving in positions of regulatory oversight will be enormously important. For far too long, the Fed has ignored or downplayed its responsibility to focus on combating unemployment. With Janet Yellen in a position of greater power to influence policy, and with new troops to back her up, the Fed could be a different animal altogether, for years to come.