By: MJ Lee
February 10, 2014
Newly sworn-in Federal Reserve Chair Janet Yellen has signaled that under her watch, she wants the U.S. central bank to be known as a champion of Main Street.
In private conversations with senators as well as in her few public comments, Yellen, who was sworn in on Feb. 3, has indicated that economic inequality and the challenges facing the middle class loom large in her mind. Colleagues and friends say such themes have shaped Yellen's decades-long career in academia and government.
Those issues are all the more salient now as she takes charge of the Fed amid widespread concern about the struggles of the middle class in an uneven economic recovery.
Yellen's predecessor, Ben Bernanke, didn't shy away from discussing the real-world implications of Fed policies, and he spoke publicly about his small-town roots. But the new Fed chair's emphasis on the importance of bringing up the middle class over the past few months has resonated in Washington, where economic mobility is increasingly a defining theme for President Barack Obama and his party.
"She understands -- people that are sober-minded about this understand -- that income inequality is bad for the wealthy, too. It's bad for a long-term growing economy," said Sen. Sherrod Brown (D-Ohio), who pushed for Yellen to get the job and spoke with her at length during the confirmation process. "She'll be a Fed chair that gets out and sees the real economy more and talks to people."
Fellow economists say inequality has been a deep concern of Yellen's since her earliest days as a scholar.
"In talking to her, it's clear that she cares a lot about having a society where everybody has a shot at a decent life," said David Levine, a professor at University of California, Berkeley's Haas Business School who was mentored by Yellen.
There are limits, however, to how much Yellen can do as Fed chair to directly address concerns of the middle class, particularly an issue like inequality. And if she decides to speak out on the topic, she risks getting caught in a Washington crossfire as Democrats and Republicans use the debate over the plight of the middle class to gain political points in an election year.
"Even if she believes strongly in those goals, it's going to be a tremendous challenge," said Jim Adams, a professor at the University of Michigan who has known Yellen since the 1970s. It will be critical for his friend to avoid "coming across primarily as a political person," he added.
A representative for the Fed declined to comment for this story. Yellen will testify before the House Financial Services Committee on Tuesday and Senate Banking Committee on Thursday.
While the tools the Fed has at its disposal to stimulate the economy are powerful, they are also blunt.
In recent years, the central bank has been purchasing massive quantities of Treasury and mortgage-backed securities each month to help keep long-term interest rates low to spur on investment and, hopefully, hiring. But while the Fed can turn on powerful programs like quantitative easing, there isn't a lot it can do to direct exactly how the economic juice makes its way through the economy.
For instance, low interest rates have led to a surge in mortgage refinancing in recent years, putting more spending money in consumers' pockets and in turn boosting the overall economy. But it's difficult to measure how much such results have helped close the income gap.
Bernanke has noted the Fed's limitations in targeting how its stimulus programs work their way into the economy.
"The best way to address inequality is to create jobs. It gives people opportunities. It gives people a chance to earn income, gain experience and to ultimately earn more," he said at a November 2011 news conference. "But that's an indirect approach; that's really the only way the Fed can address inequality per se."
Yellen's rise to the top Fed job -- which follows her tenure as president of the San Francisco Fed and vice chair of the central bank -- comes as Democrats hope the issue of economic equality can deliver their party political victories in the midterm elections. They have so far pushed, unsuccessfully, to extend emergency unemployment benefits, and have also made raising the minimum wage a centerpiece of their campaign against conservatives.
Some in the party argue that limitations aside, the central bank can still do plenty to broadly target income inequality by focusing on its mandate of lowering the unemployment rate.
This is a discussion that Yellen has recently had with some senior Democrats on Capitol Hill, some of whom have said their preference is for the Fed to keep in place its stimulus program until the unemployment rate drops significantly.
"If you're objective, you're moving more away from having the Fed be just an inflation fighter and more towards a dual responsibility of economic growth and inflation fighter," Sen. Chuck Schumer (D-N.Y.) said in a recent interview. "And she is clearly in that camp."
Sen. Jon Tester (D-Mont.), who spoke to Yellen leading up to her confirmation, suggested that the Fed chair's concerns about income inequality shouldn't be confused with populist ideology.
"She's very concerned about the middle class, but I don't think she wants to do it at the expense of others. I think she wants to bring everybody up," Tester said. "She's very concerned about the income differentials."
Putting aside the Fed's tools, Yellen could also use her platform to publicly highlight concerns about the impact of inequality on the broader economic recovery and bring attention to the issue.
"I'm going to want to communicate the message that we're devoted to improving the lives of households in the United States and doing things that benefit Main Street," she told The Washington Post in a recent interview.
According to Yellen, her interest in the human side of economics can be traced back to her earliest years.
She told Time magazine in her only extensive interview since being confirmed as Fed chair that her upbringing helped her understand the effects of unemployment in "human terms." She grew up hearing stories about the Great Depression from her parents and witnessed financially struggling patients come in to see her father, a family doctor.
Her job at the Fed, she said, is "about trying to help ordinary households get back on their feet and about creating a labor market where people can feel secure and work and get ahead."
And former colleagues and friends of Yellen say income disparity and aiding the disadvantaged are concepts that have come through both in her academic research and in their private interactions with her.
Andrew Rose -- a professor at Haas who guesses that, aside from Yellen's Nobel Prize-winning economist husband, George Akerlof, he has been the Fed chair's most frequent co-author on research papers -- said he remembers discussing the issue of inequality "extensively" with Yellen some 25 years ago.
"Washington, I know, is fixated on it now, but economists? We've been worrying about increase in equality ... for a long time," Rose said.
In fact, it was in 1990 that Yellen and Akerlof published a paper that has since been widely cited in economic circles. Titled "The Fair Wage-Effort Hypothesis and Unemployment," it explores the idea that workers tend to put less effort into their jobs and feel angry if they are paid less than what they believe is fair.
"The consequence of this anger is to reduce their effective labor input below the level they would offer if fully satisfied," wrote the couple, who married in 1978.
"If you look at the broader arc of her work over the decades [that] she's been an economist, I think that would be [that] the issue of unemployment and labor markets was absolutely essential," said Laura Tyson, Yellen's colleague at Haas School of Business who, like Yellen, served as chair of the Council of Economic Advisors under Bill Clinton. "That very quickly leads to concerns about income inequality because so much of most people's incomes depend on labor market conditions."
Republicans are sensitive to the idea of a Fed chair nominated by Obama highlighting issues like inequality and the struggling middle class.
"It's what they believe is the wedge issue for 2014 that will allow them to win," Sen. Bob Corker (R-Tenn.) said of Democrats.
For their part, as the midterm elections draw closer, Republicans will likely continue to press the Fed on how much its post-financial crisis stimulus program has actually helped those on Main Street.
"This QE, what it's done, is it's made wealthy people wealthier, but the people that are at the low end of the totem pole really have not seen any benefit from this," Corker said.
Those who know Yellen predict that she will avoid getting entangled in the politics of the debate.
"She takes very seriously the responsibilities of the institution she's been working with for much of her adult life at this point," Levine said. "I don't think she's going to start some form of mission creep that says the Fed should be working on these issues directly."