New York Times
POSTED: 1:30 a.m. HST, Sep 20, 2013
As the favorite to succeed Ben Bernanke to lead the Federal Reserve, Janet L. Yellen faces no shortage of hurdles.
The first would be to win confirmation from the Senate — an obstacle that doomed the previous front-runner for the job, Lawrence H. Summers.
Although Yellen faces much less potential opposition than Summers did, the White House is not taking Senate approval for granted. Even as the administration informed legislators on Capitol Hill on Thursday that Yellen probably would be President Barack Obama's nominee, one official said the point of the calls was not so much to gauge support but to tell Democratic senators they should defend Yellen if she comes under attack before a formal nomination.
The second, even bigger, challenge would be to manage the central bank's retreat from its unprecedented efforts to stimulate the economy, even as the nation's job market remains frustratingly weak more than four years after the Great Recession.
With the collapse of Summers' candidacy, White House officials began calling Senate Democrats about the Fed choice; a senior congressional aide said the only name they have mentioned has been Yellen's. Since she has become the focus of public discussion, the president's staff is worried that she could become a target for criticism, just as Summers was, before the White House actually nominates her and can defend her.
Sen. Jeff Merkley, D-Ore., who serves on the Banking Committee, said in an interview Thursday that the White House had accelerated the vetting process for Yellen.
"Certainly my impression is the White House is taking a very serious and fast track examination of her as a potential nominee," Merkley said.
Although Yellen enjoys strong support from Senate Democrats — a third of the caucus took the unusual step of signing a letter urging the president to nominate her, even before the White House indicated it was leaning toward Summers — Senate Republicans will be more difficult to persuade.
Some, like Sen. Richard C. Shelby, R-Ala., an influential member of the Banking Committee, have expressed reservations about her leadership in the past. Shelby voted against confirming her as vice chairman of the Fed in 2010.
Despite the opposition, Yellen, if nominated, is expected to win Senate confirmation and assume the leadership of the Fed early next year.
Bernanke handed his successor a gift this week when the central bank surprised Wall Street and many economists by not easing the stimulus effort.
On Wednesday, Bernanke walked back his earlier suggestion that the Fed's huge bond buying effort would cease when the unemployment rate falls to 7 percent, instead leaving the door open for that form of stimulus to continue well into 2014 and perhaps beyond, even if that jobs threshold is breached.
That flexibility is something that Yellen might well take advantage of. As the most prominent member of the Fed's dovish flank, other than Bernanke himself, Yellen has focused more on the dismal state of the labor market and the pressures facing poor and middle-class families than on the potential threat of financial instability and inflation down the road.
In a major speech in February, Yellen highlighted not only the elevated unemployment rate, but also long-term joblessness, the high poverty rate, sluggish wage growth, labor force dropouts and homelessness as major reasons for the Fed to continue the stimulus.
"The effects of the recession and the subsequent slow recovery have been harshest on some of the most vulnerable Americans," Yellen said.
While the unemployment rate has fallen steadily, hitting a five-year low of 7.3 percent in August, much of that improvement has come from workers dropping out of the labor force rather than vigorous job creation. The monthly pace of new jobs has slowed, falling from well over 200,000 new jobs being added each month at the end of 2012 to 169,000 in August 2013.
A more telling indicator of the continuing weakness of the economy, analysts say, is the proportion of Americans who are part of the labor force, which in August hit 63.2 percent, a 35-year low.
While some of that decline is because of structural factors like the retirement of baby boomers and the continuing shift from industrial jobs, the trend has accelerated significantly since 2007, prompting many economists to conclude it is primarily a cyclical phenomenon that can only be cured by faster economic growth.
Bernanke, in fact, highlighted the falling participation rate in a news conference after the Fed's decision Wednesday.
"I think there is a cyclical component to participation, and in that respect, the unemployment rate understates the amount of sort of true unemployment, if you will, in the economy," he said.
By stepping back from a threshold that he now says is misleading, Bernanke indirectly acknowledged just how weak the job market remains, many economists said.
"It's not just about one number reaching a tipping point," said Doug Handler, chief U.S. economist at IHS. "The unemployment rate is a key indicator but it is not indicative of the overall health of the labor market. By looking at the participation rate, the Fed is using a more holistic assessment."
The drop in labor participation has affected broad swaths of the job market, but men in particular have been hard hit. For example, the participation rate among men older than 16 fell from 73.5 percent in early 2007 to 69.5 percent in August 2013. That marks the lowest participation rate for men since the Bureau of Labor Statistics compilation of the data, which goes back to 1948. The participation rate for women has also fallen, but not as sharply, hitting 57.3 in August 2013, down from 59.4 percent in early 2007.
That disparity was heightened because the sectors that were among the hardest hit in the recession, like construction and manufacturing, tend to be major employers of men. Other, more robust sectors in the recovery, like health care, tend to employ more women.
For Yellen, or whoever takes over the Fed, reversing this trend will be difficult, even with the option of keeping the additional stimulus going into 2014 and perhaps beyond. Although the Fed's huge bond purchases have helped revive the housing market by keeping interest rates low, the millions of construction jobs that vanished with the housing bust have failed to return. The infusion of money into the economy has helped push the stock market to record highs, but companies remain reluctant to hire.
In the end, the key to reviving the labor market is for overall economic growth to increase, said Ian Shepherdson, chief economist at Pantheon Macroeconomics, who suggested that plenty of Americans are eager for a chance to work again. "To think they won't come back," he said, "is a profoundly depressing view of the American workforce."