Why Janet Yellen Will Craft the Greatest Fedspeak Ever
NEW YORK (TheStreet) -- Call it a gift of Fedgab, because Janet Yellen has it.
Former Federal Reserve Chairman Alan Greenspan was known for his so-called Fedspeak, which was a term often used about the central banker when he was intentionally ambiguous communicating Fed policy to markets.
It was a tactic that current Chairman Ben Bernanke jettisoned as the U.S. economy rebounded from the worst recession since the Great Depression, particularly to communicate to fragile global markets how the Fed was supporting the recovery.
"That is the virtue, I think, of Yellen," said David Weiman, an economics professor at Barnard College.
Economists and analysts in interviews about Yellen, who President Obama nominated on Wednesday to be Bernanke's successor, said one of the central banker's strongest qualities is her ability to clearly communicate complex monetary policy.
Throughout her years as the San Francisco Fed president and as the vice chair of the Board of Governors, Yellen has delivered speech after speech that avoids typical Fed jargon. Before her Fed days, Yellen wrote with economist Alan Blinder about the macroeconomic lessons during the Bill Clinton presidency, called "The Fabulous Decade."
"It's extremely well written, it's thoughtfully analyzed and it actually conveys a sophisticated message and it does so in terms that the educated layperson can certainly understand," said Weiman.
As an example of her ability to explain difficult subjects, Yellen on April 16, 2009, during the throes of the recession, delivered a speech about asset bubbles and the work of Hyman Minsky. Minksy's research focused on financial crises, and it was better-known for addressing "asset price bubbles."
Yellen weaved through the speech agreeing and disagreeing with the assessment that central banks should always act to prevent the formation of asset bubbles.
"[B]ursting bubbles can seriously harm economic performance, and monetary policy is hard-pressed to respond effectively after the fact. Therefore, central banks may prefer to try to eliminate, or at least reduce the size of, this threat directly," Yellen said.
She then discussed how new financial instruments that started the 2008 financial crisis were difficult even for central bankers to identify.
"This created a new wrinkle that even Minsky may not have imagined. Some of the investors who put money into highly risky assets were blithely unaware of how far out on a limb they had gone. Many of those who thought they were in the hedge category were shocked to discover that, in fact, they were speculative or Ponzi units," Yellen said.
The speech effectively described the troubles that triggered the financial crisis, without spiraling into the weeds of credit spreads, derivatives trades and exotic mortgages.
A central characteristic for the next Fed chair will be clearly describing the Fed's dual mandate of full employment and low inflation. Specifically, market participants and everyday Americans will look to Yellen to address the 6.5% unemployment rate and 2% inflation rate the Fed considers as "thresholds" to end to its current economic stimulus program.
The Fed is currently purchasing on a per-month basis $40 billion in mortgage-backed securities and $45 billion in longer-term Treasuries. Last month, many economists and analysts were expecting the central bank to scale back the amount of monthly asset purchases but the Fed's policy-making wing surprised markets by leaving policy unchanged.
The Fed signaled during the summer that central bankers were seriously considering tapering monthly monetary stimulus. Minutes from the September meeting, released on Wednesday, showed that members were worried a decision not to scale back purchases would leave markets uncertain as to what the central bank was trying to communicate.
The Fed at some point will begin to taper its stimulus, and it likely will be Yellen's first big communications hurdle.
"She is always ... extremely well prepared," said Heidi Hartmann, an economist and president of IWPR. "She is going to be very careful and I know for myself if I [prepare] before an interview I'm more successful at getting the point across that I want to get across."
Yellen was influential in the unprecedented communications changes the Fed embarked on during Bernanke's second term. And while many experts credit her for those advances, they admit that Bernanke has done a good job implementing Yellen's ideas.
But that also leaves the question of how much better Yellen can be than Bernanke at communicating unknown territory facing the Federal Reserve: slowing the pace of asset purchases, then ending asset purchases, then raising the federal funds rate, and eventually unwinding the Fed's positions in all the asset purchases it has made since 2008. And maybe most importantly, setting a timeline for those actions so that markets can react accordingly.
"I think in a way the issue is not so much more or less communication, but different communication," said Karim Basta, director of economic research at hedge fund III Associates. "It goes back to more of how a Greenspan Fed would operate, which is more discretionary, looking at a wider range of variables rather than what we've gotten used to -- these 'thresholds.'"
It's certainly possible that Yellen backs away from specific thresholds, but how she decides to communicate Fed policy will be uniquely hers. Years as an economist and as a policy-maker in the public eye may already have prepared Yellen to master the next Fedspeak.
-- Written by Joe Deaux in New York