THE BLOG
02/06/2014 11:19 am ET Updated Apr 08, 2014

A Different Chair

And so, with this latest decision by the U.S. Federal Reserve to pare down monthly asset purchases by another 10 billion dollars the tenure of chairman Ben Bernanke is finally over. After 8 tumultuous years the baton now passes to Janet Yellen.

Outwardly at least, the transition will be seamless. As vice-chair of the Board of Governors, Janet Yellen has participated and voted for all Open Market Committee decisions in recent years. Recent Fed statements likely also reflect many of her views about the state of the economy and the preferred courses of action.

Superficially, Janet Yellen's background is remarkably similar to Bernanke's. Each holds a PhD from a prestigious Ivy League university. Both spent most of their early careers in academia, rising to the top echelons of their profession. And their policy apprenticeship included chairing the Council of Economic Advisors and serving as members of the Fed's Board of Governors before getting the top job.

But behind this picture of continuity, monetary policy will change -- imperceptibly at first -- from recent practice. To some extent this is only natural. The multitude of extraordinary measures adopted by the Federal Reserve in the last five and half years will need constant tinkering for a long time. But much will also be due to the differences in personalities between the two chairs.

Three aspects in particular strike me as liable to become important in the coming years. First, while much of Bernanke's personal interest and expertise was on financial markets and monetary policy, Yellen's own focus has always been more on understanding labor markets frictions and outcomes.

Bernanke instinctively understood the potential for a financial crisis to develop into a full fledged economic collapse and was able to draw on experiences from other countries and different times. His long training in producing and examining high quality academic research provided him with a minute knowledge, and more importantly a deep understanding, of economic history. When the financial crisis hit he often seemed like the only one in the room acting like a grown-up.

By contrast, much of Janet Yellen's career reflects her deep concern about the tragedy of unemployment, and issues such economic fairness and income inequality. Reading thorough her research and policy speeches, it is clear that she believes the primary goal of monetary policy is to stabilize the business cycle in order to mitigate unemployment.

Consciously or not, the dual mandate will be interpreted in the coming years to mean more of a focus on full employment and less on inflation. And the tension between protecting against the threat of new asset bubbles and ensuring the economy finally reaches escape velocity that has been apparent for some time will only become more pronounced.

The second difference is one of method. Intellectually, Bernanke remained largely a prisoner of his excellent academic education. He preferred to frame his thoughts in the context of broad ideas and theoretical models, instead of the less structured, experience-based style habitually favored by his predecessor.

This approach served Bernanke extremely well. His relative lack of experience was irrelevant in a world where old rules no longer applied. Instead, the mantra that there is nothing more practical than a good theory was never more relevant than in the last six years, as he showed a remarkable ability to devise new policy responses at will.

Despite her academic background, Janet Yellen's Fed is unlikely to rely so heavily on modern economic theory. In part this is simply because few central bankers can hope to match Bernanke's skill in drawing practical lessons from frontier academic research. But another reason is that there are also subtle differences of style between them. Bernanke was a straightforward and an unassuming chair. While he relinquished Alan Greenspan's confident and authoritative approach that is typical of many central bankers, this also meant that he was always eager to learn, discuss and improve.

Past experience suggests Yellen is likely to be a much more assertive chair. For a glaring example look no further than the voting record during her first term at the Board of Governors. She had no trouble dissenting, once even out-voting Alan Greenspan. Her supporters maintain she has a reputation for being approachable, but Yellen's speeches give no hint that her overall views on monetary policy have really evolved throughout her career.

These stylistic differences will manifest themselves in several other places. The ability to build a consensus around Fed policies is one of them. Forging a compromise among voting members will prove far more trying, as the effects of the financial crisis wane. Another issue concerns outward communication, an area that has often proved difficult for Ben Bernanke, despite his best efforts and natural candor. Both matters will test Janet Yellen's skill sooner rather than later.

Three subtle, and yet key differences. Hopefully these are the right qualities needed for the next Fed chair.

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