November 15, 2013
President Obama's choice to succeed Ben Bernanke as Chairman of the Federal Reserve System, current Fed Board Vice Chair Janet L. Yellen, appeared in a confirmation hearing before the U.S. Senate Committee on Banking, Housing, and Urban Affairs yesterday. We asked Professor Mitch Abolafia to share his thoughts with us on a few matters. Professor Abolafia is currently working on a book about decision making at the Federal Reserve titled Interpreting the Economy: Power and Practice at the Federal Reserve. Mitchel Y. Abolafia, PhD
Professor, Department of Public Administration & Policy
Q: Why is the nomination of Janet Yellen getting so much attention from the press?
Abolafia: With the gridlock in Congress, the Fed and its monetary policy has become the only reliable manager of the economy. Any hope that fiscal policy could contribute in a positive way to the recovery is nearly vanished. Therefore the preferences of the presumptive next chair of the Fed are all the more important.
Q: What do you think those preferences might be?
Abolafia: Janet Yellen is committed to continued stimulus for the economy and the related goal of reducing the high unemployment rate. I expect that markets will respond positively to her confirmation because of their preference for continued stimulus.
Q: Why is there so much talk about transparency associated with Yellen's appointment?
Abolafia: Janet Yellen, like Chairman Bernanke, believes that Fed policy will be most effective when the Fed's intentions are made clear to investors and consumers. It is not the small changes in short term interest rates that move the economy, but rather the interpretation by economic actors of the signal given by those changes. So the clearer the signal, the more likely firms and consumers will make decisions consistent with the Fed's goals. Of course, this assumes that the receivers interpret the signal the way the Fed intended. That is more unlikely than it seems.
Read Professor Abolafia's remarks on Central Bank transparency from an interview he gave during a visit to USC Annenberg, April 15, 2013
Visit Professor Abolafia's Faculty Page