More engaging face of the Fed

FEDERAL Reserve vice-chair Janet Yellen has been nominated by President Barack Obama to be the next Fed chairman. Her public mien is gentle and engaging, qualities that are likely to expedite her confirmation process and also influence her leadership of the Fed.

Things were not always so in Fed land. Historically, Fed chairmen ran the Federal Open Market Committee (FOMC) with iron hands, imposing their will on their colleagues and policy and often dropping policy shifts as unexpected shocks on the markets and the economy. However, the Alan Greenspan Fed embarked on a practice of driving policy more by consensus among FOMC members, with regular public statements as to the intentions of Fed policy and the likelihood or inevitability of future policy changes. Fed chairman Ben Bernanke has intensified each of these trends, and we would expect chairman Yellen to follow suit.

Even apart from collegiality, there is reason to think that a Yellen Fed would be at least as communicative as its two predecessors. Short-term interest rates remain at the zero bound. The US banking system, the traditional transmission mechanism from Fed policy to the economy, is still essentially flat on its back. The one policy tool the Fed has left in its arsenal is forward guidance on its intended future path of short rates. To maximise the usefulness of forward guidance, a Yellen Fed would need to be just as communicative as Mr Bernanke's.