The Yellen promise

The Yellen promise

But for emerging markets,the solutions begin at home

But for emerging markets,the solutions begin at home

Santayana’s dictum that “those who cannot remember the past are condemned to repeat it” may not quite apply to US Federal Reserve chairmen,who are assigned to repeating the past only after having studied it in great depth. Ben Bernanke,a scholar of the Great Depression of the 1930s,had to preside over the Great Recession of recent times. Now,his putative successor,Janet Yellen,a student of efficiency wage models,inherits an American economy grappling with 7.3 per cent unemployment. What I particularly like about Yellen,though,is that besides her careful study of the past — unlike most fellow economists — she is quite an ace on the future. Yellen was the topper out of 14 Fed policymakers in predictions made in speeches and congressional testimony between 2009 and 2012,according to an analysis done by the Wall Street Journal. All in all,President Barack Obama appears to have made a safe choice,and a good one,even though he was dragged kicking and screaming to this point.

Understandably,the buzz about Yellen in the US is mostly positive. Much has been made about her “dovish” tendencies: she prefers easy monetary policies to stimulate growth and employment,which is generally good news for a country that craves both. She represents continuity and can reliably build consensus because of her insider track record. This is welcome at a time when discontinuities and shutdowns are in abundance,and consensus is very much of a rarity in Washington. Her gender makes her another rarity in economics and high finance. In the meantime,with Congress,the federal government and fiscal policy held hostage by the extreme right-wing of the Republican party,a credible and trustworthy face to the Fed takes on even more significance.

In fact,the audience for Yellen’s actions and words extends beyond the borders of the US. The Fed serves a much larger audience today,that is,the wider global economy. In recent months,concerns about the US tapering its $85 billion programme to buy treasury and mortgage-backed securities have been creating havoc in emerging markets across the board. Hot money was exiting from markets such as India and Brazil,chasing higher returns in the US. While the dreaded taper has been put off,the widespread anticipation is that Yellen will be predisposed towards preserving the easy money policy as long as necessary to juice up growth and bring down unemployment in the US. It is no surprise,therefore,that stocks in Asia rallied and emerging market currencies,from the Indonesian rupiah to the Mexican peso,appreciated after the Yellen news. Given the interlinked nature of global capital flows and the rise of speculative investors,Yellen may well be stepping into a bigger job than her predecessor’s,as de facto central banker to the world.


So,it is only appropriate that we have a reliable stalwart in the chair. But before we all get up and start dancing in the aisles,it is time to keep three caveats in mind about what to expect from Yellen.

First,as my Fletcher School colleague,Amar Bhide,puts it: a “boring leader at the Fed” is needed. There has been much focus on monetary policy and its powers,which are debatable,while the more prosaic role of the Fed in providing supervision and regulation of the banks has been pushed into the background. Yellen would be well advised to get her colleagues to refocus on that unglamorous but essential work.

Second,while it is fine for emerging markets to be celebrating Yellen’s arrival,it is time to cut the party short and get back to fixing the fundamentals that ail them. India,for instance,received a nasty reminder of this fact when the IMF cut its growth forecast for the country at about the same time as Yellen’s announcement. In other words,while the Fed’s actions matter,the primary factors that help or hinder the country reside right here,at home. Unlike the Indonesian rupiah or the Mexican peso,the rupee fell in the wake of the Yellen announcement (though after it had appreciated from its all-time low). And India is not alone in having fundamental internal problems — challenges that cut across governance,infrastructure,exclusionary growth,demographic and resources crises,among others. No amount of the “Yellen effect” will fix these.

Third,all the advance predictions about Yellen may yet prove to be false. The track record of recent Federal Reserve chairs is that they end up defying early perceptions about them. Paul Volcker was a much-maligned man during his tenure in the job,as unpopular with the common worker as with the presidents he served. Today,he is,unquestionably,considered one of the most beloved of wise men. Alan Greenspan,his successor,was about as close to divinity as it gets in finance,but he turned out to have feet of clay. The makings of the 2008 financial crisis happened under his watch. And then there was Ben Bernanke,the mild,tweedy academic,who took on one of the most swashbuckling and aggressive roles for Fed chairmen in modern times in responding to the crisis. Moral of the story: do not jump to conclusions about what Yellen will actually do.

At the end of Yellen’s tenure,she may turn out to be less of the dove or the force of continuity and consensus than we expect. Her proclamations and decisions may be felt more in emerging markets rather than in the US. She may be the mother of all central bankers anywhere. If the past is any guide,there are likely to be many ways in which Janet Yellen will surprise us all.

The writer is senior associate dean of international business and finance at The Fletcher School at Tufts University,founding executive director of the Institute for Business in the

Global Context,and the author of ‘The Slow Pace of Fast Change’