Inflationist likely to be Obama's pick for Fed vice chairman


Yellen Said to Be Obama's Pick for Fed Vice Chairman

By Hans Nichols and Scott Lanman
Bloomberg News
Friday, March 12, 2010

WASHINGTON -- Federal Reserve Bank of San Francisco President Janet Yellen is President Barack Obama's pick for vice chairman of the central bank in Washington, two people with knowledge of the selection process said.

The nomination is pending completion of vetting by the Obama administration, one person said. The vice chairman gets a four-year term, subject to Senate approval, and a separate term on the Fed Board of Governors. The people spoke on condition of anonymity because the selection hasn't yet been announced.

Yellen, 63, would replace Donald Kohn, a 40-year Fed veteran who resigned last week effective June 23. Yellen, who served as President Bill Clinton’s chief economist in the 1990s, said last month that the U.S. economy "still needs the support of extraordinarily low" interest rates. She would gain a permanent vote on monetary policy, instead of having a vote one year out of every three as a regional Fed chief.

Jen Psaki, a White House spokeswoman, declined to comment. Lily Ruiz, a spokeswoman for the San Francisco Fed, had no immediate comment.

The Obama administration is also working to fill two other vacancies on the seven-member Fed board. Among the candidates is Sarah Bloom Raskin, 48, Maryland's commissioner of financial regulation, according to one of the people familiar with the selection process. Raskin, contacted outside her home in Takoma Park, Maryland, referred questions to the White House.

Raskin, an attorney, was appointed in August 2007 as Maryland's top banking regulator. She was previously managing director of Promontory Financial Group, a consulting firm, and worked at the New York Fed and as a counsel for the Senate Banking Committee. She graduated from Harvard Law School in 1986, the same year as Elena Kagan, Obama's solicitor general. Her husband, Jamie Raskin, is a law professor and a Democratic Maryland state senator.

Peter Diamond, an economics professor at the Massachusetts Institute of Technology, is also under consideration. Diamond, 69, has been a professor at the school in Cambridge since 1966, spanning Fed Chairman Ben S. Bernanke’s studies there for a doctorate in the late 1970s.

Bernanke, 56, won a second four-year term in January in a 70-30 Senate vote, as supporters who credited him for stemming the financial crisis and recession overcame opponents saying he failed to prevent them.

As vice chairman, Yellen would have a closer role in guiding the Fed as officials decide how much longer to keep the benchmark rate close to zero and how to use new policy tools to tighten credit as the nation emerges from the worst slump since the 1930s.

In her most recent speech, on Feb. 22, Yellen said the U.S. economy will operate below potential this year and next and still needs low interest rates to gain strength.

"This is not the time to be tightening monetary policy," Yellen said in San Diego. "But eventually the economy will gain enough momentum and won't need today’s extraordinarily low interest rates."

Robert Parry, Yellen's predecessor as president of the San Francisco Fed, said she is "probably pretty much in tune with the chairman's thinking. I can't imagine there will be many candidates as qualified as she is,” Parry said.

At the same time, Gregory Hess, a former Fed economist who's now faculty dean at Claremont McKenna College in Claremont, California, said Yellen's views on inflation may be "worrisome" to investors and could result in higher bond yields.

"She truly does understand the costs of recessions, and I think she does understand the personal cost that this puts on people's lives," said Hess, a member of the Shadow Open Market Committee, a group of economists that critiques Fed policy and has traditionally favored keeping inflation close to zero. "The question is: Does she take that too far in the implementation of policy?"

The Fed vice chairman has few formal duties except to preside over board meetings in case of the chairman's absence. Kohn worked closely with Bernanke to coordinate the Fed's response to the financial crisis; Kohn and his predecessor, Roger Ferguson, also worked on regulatory efforts with central banks outside the U.S.

Yellen spent most of her career teaching economics and researching labor markets, joining the University of California at Berkeley in 1980. She and her husband, George Akerlof, a Nobel Prize-winning economist, have written more than a dozen papers that included studies on unemployment, wages, street gangs, and out-of-wedlock births.

In 1994, Clinton appointed Yellen to be a Fed governor in Washington, serving until 1997, when the president moved her to the White House to chair the Council of Economic Advisers. She left the position in 1999 to return to Berkeley.

Yellen rejoined the Fed in 2004 as president of its San Francisco district bank, which represents the largest region by area and economic output. She has always voted with the majority of policy makers on interest-rate decisions.

She was last a voting member of the Fed’s policy-setting Open Market Committee in 2009 and won't have a vote until 2012. The New York Fed president, who serves as FOMC vice chairman, is the only one of the 12 regional Fed chiefs to have a permanent vote on monetary policy.

A native of Brooklyn, New York, Yellen was an assistant professor at Harvard University in Cambridge, Massachusetts, from 1971 to 1976, spanning Bernanke's time as an undergraduate there.

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