The Wall Street Journal

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BEHIND THE FED CURTAIN A12 |Monday, May13, 2013 THE WALL STREETJOURNAL. THE WALL FRSTREETOM PAGE ONE JOURNAL. ATop Contender at MONDAY,the MAYFe 13, dF2013 aces Test The Yellow ContinuedfromPageOne Prose of just Wall Street,” he said. But she has met resistance Janet Ye llen Texas? among othersinside and outside Age: 66 the Fed. James Bullard, the presi- ContinuedfromPageOne dent of the St.Louis Fed, said in Résumé: BrownUniversity tivestory line.Texas secession an interviewthat if the central B.A.; Yale UniversityPh.D.; fiction falls intoalong line of bank tried toohardtobring down UniversityofCalifornia, what-if books exploring alternate unemployment, it might uncork Berkeleyprofessor; Fed versions of history. inflation without doing much to Winston Churchill contributed foster jobs. governor; Chairwoman of to a1931 collection of essays “A lot of people aretalking PresidentClinton’sCouncil of called “IfItHad Happened Other- about putting moreweight on un- Economic Advisers; San wise” with an entryenvisioning employment,” he said, without FranciscoFed president; howWorld WarImight have been citing Ms.Yellen directly.“Idon’t avoided—if the Confederacyhad think it’sagood idea.” Federal ReserveBoardvice wonthe Civil War. Whoever is nominated by Pres- chairwoman. Newt Gingrich added to the ident Barack Obama forthe post Known for: Focus on Fed’s genrewith aseries of novels he is likely to faceclose scrutinyin ‘dual mandate’ofinflation co-wrotewith William R. Senateconfirmation hearings. Forstchen, including “1945.” It Sen. RichardC.Shelby of Ala- and unemployment. sees theNazis temporarily win- bama, atop Republican on the Family: Married to George ning World WarIIinEurope,trig- SenateBanking Committee, voted Akerlof,winner of the 2001 gering aCold Warwith the U.S., against her confirmation as vice Nobel Prizeineconomics. One which had fought Japan. chairwoman in 2010,accusing her Some alternate-historynovels of “inflationarybias.” son, Robert Akerlof,an have envisioned aseparateTexas, Among privateeconomistssur- economistatthe University notably 1990’s“TheDifference veyedlast week by TheWall of Warwick in U.K. Engine” by William Gibson and Street Journal, 29 of 38 said they BruceSterling,which explores expected Ms.Yellen to getthe job. what might have happened to the Other candidates could include world had computersbeen per-

former Fedvicechairman Roger s fected in Britain acenturyearlier.

Ferguson and former Treasury ew In the book,Texas and California secretaries TimothyGeithner and gN morph intoindependent nations. LawrenceSummers. But the suggestion that Texas Bloomberg News Bloomberg

“IfIwereinthe WhiteHouse I Bloomber might break away has only re- would relish the idea of nominat- cently become acommon plotline. ing the firstfemale Fedchair- James Tobin, who would later win Some authorssay their interest woman, with arésumé that is po- aNobel Prizeineconomics.She wasspurred by recent events, tentially betterthan the current decidedtopursue an economics CrowdedField Includes Current FedChairman such as Texas Gov.Rick Perry’s Fedchairman,” said Vincent Rein- Ph.D.atYale,whereher interest remark in 2009 that “ifWashing- hart, MorganStanley chief U.S. in unemployment grew while BenBernanke LawrenceSummers Donald Kohn toncontinues to thumb their nose A Top s Contender at the Fed economist and former head of the working with Mr.Tobin, her men- ew Age:59 Age: 58. Age: 70 at the American people youknow,

Fed’smonetaryaffairsdivision. torand dissertation adviser. gN Résumé: Fedchairman since Résumé: Former U.S. Treasury Résumé: Former Fedvice who knows what might come out Still, he said, “I think market Mr.Tobin, achild of the De- 2006; architect of easymoney Secretary,HarvardUniversity chairman and governor.Brookings of that” (Mr.Perryhas repeatedly

participants arenervous about pression and an adviser to presi- Bloomber policies and exit. presidentand Institution fellow said he doesn’t favorsecession). Former chair of WhiteHouse and member of her,” pointing to the concern that dentsJohn F. Kennedy and Lyn- ers; John Buescher,aresearcher at she would weight employment donB.Johnson, emphasized the ut Council of economic adviser. Bank of England the RoyRosenzweig Center for Faces TestRe Over Easy Money over inflation. “Look at the AFL- human toll of high unemployment Economic Atop economist financial policy Historyand NewMedia at George CIO speech.” and the government’sobligation left: Advisers and of his generation, committee. Mr. Mason University, has champi- om Ms.Yellen impressed Mr. to combat it. He wassoimpressed fr Princeton whose brash Bernanke’sright- oned alternatehistories as away om

Obama when he sought her advice with her meticulous notes of his tt UniversityeconomicsBY JON HILSENRATHstyle would be asharp departure hand man in the financial crisis, to teach real history. as apresidential candidate, but lectures that he asked her to turn Bo department. He appears prepared from Mr.Bernanke. HarvardPh.D. admired by Fedstaff.Long “For ahistorygeek,thereare s;

THE NEXTut CHIEF of the Federal Reserve will decide when Mr.Obama, according to people were likethe Old and NewTesta- Age: 51 executiveat feeling itsoatseconomically these familiar with thematter. ment forYale Ph.D.students Re Résumé: Former U.S. Treasury TIAA-CREF. Alan Blinder days,and thereisasense in the Mr.Geithner and Mr.Summers, when he studied thertoei reversenthe Secr theetary easy-moneyand former presiden tpolicies of BenSte erBernanke,ed the Fed Ag ae: judg67 - Zeitgeist that Texas would be Images; by contrast, have strong White 1970s.“She wasalegendmentwhen thatI ty could strangleof the Feder theal economic recoveryduring 9/11 terr ifor madePrincet ontooprof essor and former pretty interesting if it really was House ties.Mr. Geithner has said arrived at graduateschool,” said Get ReserveBank of attackswhile Fedvicechairman. MIT Ph.D. itsown nation.” he doesn’t want the job; Mr.Sum- Richard Levin, Yale’spresident, se/ NewYork. Mr. former Chairman Secession fiction isn’t burning es mersisinterested, according to whoused them to studyearlyin the or Pr trigger runawayGeithner has inflationsaid Alan Gr ifeenspan madewa sotooverseas. late. StanleyFischer e- people who knowhim, but he de- 1970s. nc he doesn’twant Privatesector credentials area Age: 69 ra

clined to comment. Ms.Yellen went to work onThethe taskeF could thefalljob tobut Fedis a viceplus, butchairwomanties to Fed’sbank JanetBa Yellen,nk of Israel governor; former ‘Texas would be pretty

While Mr.Bernankedoesn’t Fedstaff in the fall of 1977, where enc career public official with close supervision beforethe crisis International Monetary Fund Ag interesting if it really appear to want athirdterm as she met her futurehusband,a meticulousecon- ties to Mrand.Obama. demandingM.A., coYale-traineduld hurt him. Harvar dPeconomist,h.D., J.D. deput ymwhoanaging director.MIT Fedchairman, the president could omist George Akerlof. They mar- eft: international economics, Johns Ph.D.; served as an academic wasits ownnation.’ ml presshim to stay.Mr. Bernanke ried the following June.“issuedNot only prescient,ro Hopkins Universit earlyy. warnings about the housing bust.adviser toAfMr-.BernankeatMIT. pf said in March he had discussed did our personalities mesh per- To hisplans “a bit” with Mr.Obama fectly,but we have alsoteralw theays financial crisis, she helped focus the Fed on jobless but declined to saymore. The been in all but perfect agreement up the best-seller lists. Mr.Sny- WhiteHouse hasn’t disclosed how about macroeconomics,Americans,” he wrote with policies aimed at stimulating the economy der’s book,which came out in the president will choose. in an autobiographyafter he won As Yellen Forecast, Inflation Has Remained BelowTarget February, is produced by asmall Theselection involves more the 2001 Nobel Prizeforatec leastonom- untilAs theunemploymentU.S. wasemerging from fallslowthe toFe 6.5%.d’s2%target. ing sales to lower-priced competi- Christian imprint he owns called than political drama. TheFed ics.Their son, Robert Akerlof, is recession in June 2009, Janet Yel- In nearly four years sinceher tors. Concerning Life Publishing.Mr. could be entering another peril- an economist teaching atMs.the Yellenlen made isaf oraecas topt: “I think contenderthe forecas fort, infla tionthehas job,been atassumingor Others Mr.made predictions of in- Maloney published his novel him- ousperiod. Thecentral bank has U.K.’s University of Warwick. predominantrisk is thatinflation belowthe target for32months flation based on the Fed’seasy- self in January. Mr.Larson’sbook pushed short-term interest rates Her husband is skBernankeeptical of will stepsbe tool owdown,not to ohwhenigh, ove rhisand termabove endsit for19. Coinre January,inflation, mone butyp herolicies —thatbecause the wasreleased by an Oklahoma to near zero,launched bond-buy- markets. In atalk at last year at the next severalyears,” Ms. Yellen, which excludes volatile food and centralbank had pumped so much companycalled Tate Publishing & ing programs that pumped tril- Warwick,hesaid, “the selectionpublic and then is farpresiden fromtofthe certain.Federal Re- Sheener gyfacesprices, hasa bigbeen beloquestionw2% mone amongyintothe financial systemto Enterprises last month. All are lions of dollarsintothe economy economistshavetoo great an ac- serveBank of San Francisco, said for51consecutivemonths. restore the economy, it would even- available on Amazon.com. and leftits own$3trillion securi- ceptancethat whateverinvestors:markets in asIspeech. she wary enough aboutManyothers, theat theriskstime andof easytually moncheapen- the dollar’s value “I’m notgetting rich off of it, ties portfolio swollen with mort- do is right.” Three years later, her forecast since, had predicted soaring infla- and push consumer prices higher. that’sfor sure,” says Mr.Maloney, gage-backed and Treasurysecuri- Ms.Yellen climbed the Fed has been largely correct, aside tion. Differing views of the econ- While inflation hasn’tmaterial- who is retired from the Air Force. ties. ranks by being methodical rather from afew brief pricespikes for omyaccountfor the difference. ized, another risk is getting more He says he is working on asequel. At some point, the next Fed than iconoclastic.She shows up at oil and food. Ms. Yellen strongly emphasizes attention: thatthe Fed’smoney One book with amajor pub- leader will need to use untested policymeetingswith carefully Inflation, as measured by the slack in the economy. This is the printing will result notinsoaring lisher,St. Martin’sPress,is“Don’t methods to reversethe process, craftedstatements. Those whoTHE PULITZERCommerce Departmen PRIZEt’sp FORersonal NATIONALidea thatwith AFFAIRShigh unemplo REPORTINGy- consumer prices, but in anew as- Messwith Travis” by Bob Smiley, raising interest ratesand siphon- work with her sayshe arrives at consumption expenditurepricein- ment, emptyhomes and unused set bubble in markets likestocksor which envisions aTexas governor ing up hugevolumes of cash from the airport hoursearly. dex, was1%inMarch, when com- factory space, companies can’t bonds. driven to secession afterhedis- banks.“They will be learning as During the mid-1990s,then- pared with ayear earlier—well be- raise consumer prices without los- —Jon Hilsenrath covers afederal plot to siphon off they go,” said LaurenceMeyer,a Fedchairman Alan Greenspan the state’snaturalresourcesand former Fedgovernor. asked her to take the lead in an ship them to California. Ms.Yellen’ssupporterssay internal Feddebateabout FranciscoFed, Ms.Yellen sounded Fedwith her strong views,but nanke, as well as inflation “Wewanted to showthe ab- thereare few betterprepared stu- whether to adopt aformal infla- early warningsabout the danger the central bank in the past three hawks—those who worrymost surdities on both sides of the dents. She wasclassvaledictorian tion target. Her preparation im- of aU.S.housing bust. “I still feel yearshas moved toward her pre- about keeping prices stable.It aisle,” says Mr.Smiley,atelevi- at Fort Hamilton High School in a pressed others. “She does her the presenceofa600-pound go- scription of sustained aggressive also laid out markersfor unem- sion writer in LosAngeles and middle-classBrooklyn neighbor- homework,” said Mr.Broaddus, rilla in the room, and that is the action. ployment rates, which the hawks former researcher forthe late hood. Her father wasadoctor her chief adversaryinthe debate. housing sector,” she said at a As Fedofficials deliberated last resisted. William F. Buckley Jr.Ofseces- who worked out of the basement During the discussion Ms.Yel- June 2007 policy meeting,ac- April about howlong to keep in- Officials haggled over the 531- sion,headds,“It obviously re- of the family’s brownstone.Her len challenged Mr.Greenspan, cording to Fedtranscripts. “The terest rateslow,Ms. Yellen deliv- word document formonths,ac- mains something people in Texas mother,who quit an elementary who wasrarely confronted, to de- risk forfurther significant deteri- ered a20-pagespeech, with 18 cording to people involved in the think could and maybe even school teaching job to raise two fine his views of pricestability, oration in the housing market, footnotes and 15 charts, making discussions.The Feddirectly con- should happen.” children, drovehim to house calls according to Fedtranscriptsand with houseprices falling and the argument that ratesshould trols inflation through itsman- Most Texans don’t want to se- and managed the family’s fi- people there. Later, as the econ- mortgage delinquencies rising stay lowuntil 2015 or later.The agement of the money supply,but cede,according to aPublic Policy nances—tucking away savings omystrengthened, she worried further,causes me appreciable speech,later praisedbyMr. Ber- many factorsinfluenceunemploy- Polling survey in January. But and tracking stock prices from the aboutthe booming stock market angst.” nanke, presaged ashiftbythe Fed ment. Officials were wary of Texans arefond of pointing out afternoon newspaper in small, and also urgedMr. Greenspan to Threemonths later,she fore- toward making clear itsintentions promising toomuch on hiring, that the statefought forindepen- neat handwriting, said Ms.Yel- raise short-term interest ratesto sawadangerous economic cas- to keep ratesdownlonger than and they struggled to define how denceoncebefore—and won—af- len’sbrother,John. head off inflation—advicehede- cade. previously planned. they would balancejob goals with teraragtagarmyled by Sam “My parentsheld us to high ac- clined,according to Mr.Meyer, “A big worryisthat asignifi- “She argues very effectively,” inflation. Houston defeated Mexican Gen. ademic standards,” said John Yel- her colleague at the time. cant drop in house prices might Charles Evans,president of the Thedocument illustrated Ms. Antonio LópezdeSantaAnna in len, the archaeologyprogram di- Ms.Yellen became chairwoman occur in the contextofjob losses, ChicagoFed said in an interview. Yellen’sviewofFed operations. 1836.The short-lived Republic of rector at the National Science of the Council of Economic Advis- and this could lead to avicious “She is constantly asking youto As long as inflation wasrunning Texas joined the U.S. in 1845. Foundation. Afterdinner,here- ersunder President Bill Clinton in spiral of foreclosures,further think about the argument that below2%, she argued, the Fed Most scholars agree that it is called, they listened to radio pro- 1997,aperiod of strong economic weaknessinhousing markets, and youhaveput on the table,espe- could affordtokeep money flow- nowimpossible forany stateto grams,including the adventure growth. She and Clinton adviser further reductions in consumer cially when it is at variancewith ing,helping bring down unem- secede,after the Civil Warand an series,“Sergeant Preston of the Gene Sperling danced with their spending,” she said, at aSeptem- other facts. People look to her ployment. 1869 Supreme Court decision in- Yukon.” hands in the air at a1999 White ber 2007 meeting.“Thepotential and listen to what she’ssaying.” Ms.Yellen also pushed for volving Texas that found that the Ms.Yellen gotinterested in House staff meeting in the effectsofthe developing credit While the Fed’ssecond-in-com- morethan ayear behind the nation was“indissoluble.” Still, economics in college. While an Roosevelt Room when the jobless crunch could be substantial.” mand traditionally stands in the scenes foranother step to signal some Texas nationalistscontinue undergraduateatBrown Univer- rate fell near 4%, according to In December,she called on the shadowofthe chairman, Ms.Yel- the Fed’scommitment to low to argueotherwise,and ahardy sity, she wasimpressed with a people at the meeting. Fedtocut interest ratesaggres- len has been outspoken. Mr.Ber- rates, said people involved in the few even meet occasionally at talk by visiting Yale professor, Later, as president of the San sively,according to Fedtran- nankewas closer personally to debate. In December,following Washington-on-the-Brazos,where scripts. Mr.Bernankechose a Ms.Yellen’spredecessor,Donald the adviceofher and Mr.Evans, delegates signed the Texas Decla- morecautious approach—until a Kohn, another potential successor, the central bank promised to keep ration of Independencein1836. Taming Inﬂation month later,when conditions who formed abond with the short-term interest ratesnear Alan R. Erwin learned howse- worsened. chairman during the crisis,said zero until the joblessratefalls to riously some took the idea in Change from ayear earlier in consumer prices forgoods and services, Shortly afterthe Fedrescued people whoknowthem. 6.5%, as long as inflation doesn’t 1979,when he wroteapioneering based on the priceindex forpersonal-consumption expenditures Bear Stearns Cos.inMarch 2008, Still, Mr.Bernankeand Ms.Yel- threaten to rise anymorethan a work of Texas secessionist fiction, 12% Mr.Obama—then asenator and len largely seeeye-to-eye. “I can’t half-percentagepoint abovethe “The PowerExchange”—and presidential candidate—called Ms. see amaterialdifferencebetween 2% goal. found that some Texans consid- 10 1Q 2013 Yellen. He wanted explanations of them,” said another central Themoves createaframework ered him the leader of areal revo- the unfolding financial turmoil banker who has seen them often foranexit plan: As the job market lution. Thetruth wasmorepro- 8 1.2% and she wasamong afew people at international meetingsinBasel, improves,the central bank will saic.Mr. Erwin, amember of the 6 he asked, said Austan Goolsbee, Switzerland. gradually stop itsbond buying. state’sPublic Utility Commission, an Obama adviser who arranged Last year,Ms. Yellen ranaFed Later, afterunemployment falls to wasmerely bored. He says he 4 the call. committeethat craftedadocu- 6.5% or lower, the Fedwill start wrotemuch of the novel, released Ms.Yellen, aDemocrat, im- ment detailing howthe Fed raising short-term interest rates. by Texas Monthly Press, during 2 pressed Mr.Obama during a30- viewedits so-called dual mandate, If inflation ticks up,itmight long-winded hearingsconcerning minute conversation as she ex- the central bank’sfocus on both move sooner.Eventually,the Fed Southwestern Bell, the telephone 0 plained the risk of modern-day inflation andunemployment, as could sell some of itsbonds and companyowned by AT&T. –2 bank runs at Wall Street firms setbyCongress. begin soaking up all that cash. “I kept telling them, ‘You need 1960s '70s '80s '90s 2000s '10s spreading likewildfirethrough Thedocument forthe first It will be up to the Fed’snext to read my book,because we Source:Commerce Dept. The Wall Street Journal markets, Mr.Goolsbee said. time made aformal 2% inflation leader to provethe plan will don’t win,’” Mr.Erwin says of the

She has ruffled feathersatthe target, agoal of both Mr.Ber- work. actual secessionists.

P2JW133000-0-A01200-1------XA OW YELL AN CY CK BLA A GENT MA e sit mpo Co BEHIND THE FED CURTAIN

ey to close the Fed’s credit spigot before financial bubbles emerge or consumer prices rise too far? As a first step, Fed officials have mapped out a strategy that maintains flexibil- ity for winding down its $85 billion-a-month bond-buying program intended to spur the economy. But the timing of the withdrawal is still being debated. “I am worried that the approach that she and many others favor does over time allow the Fed’s anti-inflation credibility to erode,” said Alfred Broaddus, former president of the Fed- eral Reserve Bank of Richmond. Born in Brooklyn to parents who lived through the Great Depression, Ms. Yellen, age 66, has called for the Fed to re- spond aggressively to high unemployment. She argued after the financial crisis that inflation wasn’t likely to emerge with the economy in such a debilitated state—a correct view, so far. Inflation has since averaged 1.8% a year. “These are not just statistics to me,” she said in a speech to the AFL-CIO labor union group in February. “We know that long-term unemployment is devastating to workers and their families.” Richard Trumka, the union president who invited her to speak, said the U.S. would be “well-served” if Ms. Yellen suc- ceeded Mr. Bernanke. “She understands the plight of Wall Street and workers, not just Wall Street,” he said. But she has met resistance among others inside and outside the Fed. James Bullard, the president of the St. Louis Fed, said in an interview that if the central bank tried too hard to bring down unemployment, it might uncork inflation without doing much to foster jobs. “A lot of people are talking about putting more weight on unemployment,” he said, without citing Ms. Yellen directly. “I don’t think it’s a good idea.” Whoever is nominated by President Barack Obama for the post is likely to face close scrutiny in Senate confirmation hearings. Sen. Richard C. Shelby of Alabama, a top Republican on the Senate Banking Committee, voted against her confirmation as vice chairwoman in 2010, accusing her of “inflationary bias.” Among private economists surveyed last week by The Wall Street Journal, 29 of 38 said they expected Ms. Yellen to get the job. Other candidates could include former Fed vice chairman Roger Ferguson and former Treasury secretaries Timothy Geithner and Lawrence Summers. “If I were in the White House I would relish the idea of nominating the first female Fed chairwoman, with a resume

THE PULITZER PRIZE FOR NATIONAL AFFAIRS REPORTING 2 P2JW133000-0-A01200-1------XA CL,CN,CX,DL,DM,DX,EE,EU,FL,HO,KC,MW,NC,NE,NY,PH,PN,RM,SA,SC,SL,SW,TU,WB,WE C M Y K Composite BGN,BMT,BRX,CCA,CHR,CKP,CPD,CXT,DNV,DRG,HAW,HLD,KCS,LAG,LAT,LKD,MIA,MLJ,NMX,PAL,PHI,PVN,SEA,TDM,TUS,UTA,WOK

A12 |Monday, May13, 2013 THE WALL STREETJOURNAL. FROM PAGE ONE ATop Contender at the FedFaces Test The Yellow ContinuedfromPageOne Prose of just Wall Street,” he said. But she has met resistance Janet Ye llen Texas? among othersinside and outside Age: 66 the Fed. James Bullard, the presi- ContinuedfromPageOne dent of the St.Louis Fed, said in Résumé: BrownUniversity tivestory line.Texas secession an interviewthat if the central B.A.; Yale UniversityPh.D.; fiction falls intoalong line of bank tried toohardtobring down UniversityofCalifornia, what-if books exploring alternate unemployment, it might uncork Berkeleyprofessor; Fed versions of history. inflation without doing much to Winston Churchill contributed foster jobs. governor; Chairwoman of to a1931 collection of essays “A lot of people aretalking PresidentClinton’sCouncil of called “IfItHad Happened Other- about putting moreweight on un- Economic Advisers; San wise” with an entryenvisioning employment,” he said, without FranciscoFed president; howWorld WarImight have been citing Ms.Yellen directly.“Idon’t avoided—if the Confederacyhad think it’sagood idea.” Federal ReserveBoardvice wonthe Civil War. Whoever is nominated by Pres- chairwoman. Newt Gingrich added to the ident Barack Obama forthe post Known for: Focus on Fed’s genrewith aseries of novels he is likely to faceclose scrutinyin ‘dual mandate’ofinflation co-wrotewith William R. Senateconfirmation hearings. Forstchen, including “1945.” It Sen. RichardC.Shelby of Ala- and unemployment. sees theNazis temporarily win- bama, atop Republican on the Family: Married to George ning World WarIIinEurope,trig- SenateBanking Committee, voted Akerlof,winner of the 2001 gering aCold Warwith the U.S., against her confirmation as vice Nobel Prizeineconomics. One which had fought Japan. chairwoman in 2010,accusing her Some alternate-historynovels of “inflationarybias.” son, Robert Akerlof,an have envisioned aseparateTexas, Among privateeconomistssur- economistatthe University notably 1990’s“TheDifference veyedlast week by TheWall of Warwick in U.K. Engine” by William Gibson and Street Journal, 29 of 38 said they BruceSterling,which explores expected Ms.Yellen to getthe job. what might have happened to the Other candidates could include world had computersbeen per-

former Fedvicechairman Roger s fected in Britain acenturyearlier. Ferguson and former Treasury ew BEHIND THE FED CURTAIN In the book,Texas and California secretaries TimothyGeithner and gN morph intoindependent nations. LawrenceSummers. But the suggestion that Texas

economist and former head of the working with Mr.Tobin, her men- ew Age:59 Age: 58. Age: 70 at the American people youknow,

participants arenervous about pression and an adviser to presi- Bloomber policies and exit. presidentand Institution fellow said he doesn’t favorsecession). Former chair of WhiteHouse and member of her,” pointing to the concern that dentsJohn F. Kennedy and Lyn- ers; John Buescher,aresearcher at she would weight employment donB.Johnson, emphasized the ut Council of economic adviser. Bank of England the RoyRosenzweig Center for Re over inflation. “Look at the AFL- human toll of high unemployment Economic Atop economist financial policy Historyand NewMedia at George CIO speech.” and the government’sobligation left: Advisers and of his generation, committee. Mr. Mason University, has champi- om Ms.Yellen impressed Mr. to combat it. He wassoimpressed fr Princeton whose brash Bernanke’sright- oned alternatehistories as away om

Obama when he sought her advice with her meticulous notes of his tt Universityeconomics style would be asharp departure hand man in the financial crisis, to teach real history. as apresidential candidate, but lectures that he asked her to turn Bo department. He appears prepared from Mr.Bernanke. HarvardPh.D. admired by Fedstaff.Long “For ahistorygeek,thereare s;

they aren’t close, according to them intoatextbook.She leftto ew to leave but mightMr. Obama association with Fedexposes him certain momentswhen all sortsof people who knowthem. When she teach at Harvardand didn’t com- gN talk him into staying?Ph.D.in RogerW.Ferguson, Jr. to criticism about precrisis thingscan happen and the world wasnominated forFed vicechair- pletethe book. economics from MIT.M.I.T. Age: 61 failures. Agecould hinder him. would be totally different,” Mr. Résumé: Former Fedvice UniversityofMichigan Ph.D. woman, forexample,she didn’t Willem Buiter, Citigroup’schief Bloomber Buescher says.Ofthe current have aface-to-faceinterviewwith economist, said Ms.Yellen’snotes TimothyGeithner chairman and currentchief Texas fancy, he adds,“Texas is ers; Othersinthe Mix Mr.Obama, according to people were likethe Old and NewTesta- ut Age: 51 executiveat feeling itsoatseconomically these familiar with thematter. ment forYale Ph.D.students Re Résumé: Former U.S. Treasury TIAA-CREF. Alan Blinder days,and thereisasense in the Mr.Geithner and Mr.Summers, when he studied thereinthe Secretary and former president Steered the Fed Age: 67 Zeitgeist that Texas would be Images;

by contrast, have strong White 1970s.“She wasalegend when I ty of the Federal during 9/11 terror Princeton professor and former pretty interesting if it really was

House ties.Mr. Geithner has said arrived at graduateschool,” said Get ReserveBank of attackswhile Fedvicechairman. MIT Ph.D. itsown nation.” he doesn’t want the job; Mr.Sum- Richard Levin, Yale’spresident, se/ NewYork. Mr. former Chairman Secession fiction isn’t burning es mersisinterested, according to whoused them to study in the Pr Geithner has said Alan Greenspan wasoverseas. StanleyFischer e- people who knowhim, but he de- 1970s. nc he doesn’twant Privatesector credentials area Age: 69 ra

clined to comment. Ms.Yellen went to work on the eF the job but is a plus, but ties to Fed’sbank Bank of Israel governor; former ‘Texas would be pretty

While Mr.Bernankedoesn’t Fedstaff in the fall of 1977, where enc career public official with close supervision beforethe crisis International Monetary Fund Ag interesting if it really appear to want athirdterm as she met her futurehusband, econ- ties to Mr.Obama. M.A., could hurt him. HarvardPh.D., J.D. deputymanaging director.MIT Fedchairman, the president could omist George Akerlof. They mar- eft: international economics, Johns Ph.D.; served as an academic wasits ownnation.’ ml presshim to stay.Mr. Bernanke ried the following June.“Not only ro Hopkins University. adviser to Mr.BernankeatMIT. pf To said in March he had discussed did our personalities mesh per- News Bloomberg left: Reuters; from Bottom News; Bloomberg Images; Reuters; France-Presse/Getty left: Agence from Top hisplans “a bit” with Mr.Obama fectly,but we have also always but declined to saymore. The been in all but perfect agreement up the best-seller lists. Mr.Sny- WhiteHouse hasn’t disclosed how about macroeconomics,” he wrote that is potentially better than the current Fed chairman,” der’s book,which came out in the president will choose. in an autobiographyafter he won As Yellen Forecast, Inflation Has Remained BelowTarget February, is produced by asmall Theselection involves more the 2001 Nobel Prizefor econom- As thesaidU.S. waVincentsemerging Reinhart,from lowthe MorganFed’s2%tar get.Stanley chiefing salesU.S.to economistlower-priced competi- Christian imprint he owns called than political drama. TheFed ics.Their son, Robert Akerlof, is recession in June 2009, Janet Yel- In nearly four years sinceher tors. Concerning Life Publishing.Mr. could be entering another peril- an economist teaching at the len madeandafor formerecast: “I think headthe offo therecas t,Fed’sinflation monetaryhas been at or affairsOthers division.made predictions of in- Maloney published his novel him- ousperiod. Thecentral bank has U.K.’s University of Warwick. predominantrStill,isk is thaheti nflasaid,tion “Ibelo thinkwthe tar marketget for32m participantsonths flation basedare onnervousthe Fed’seas y- self in January. Mr.Larson’sbook pushed short-term interest rates Her husband is skeptical of will be toolow,not toohigh, over and above it for19. Core inflation, moneypolicies—thatbecause the wasreleased by an Oklahoma to near zero,launched bond-buy- markets. In atalk at last year at the nextaboutseveraly ears,her,”” Ms. pointingYellen, which toex cludesthe concernvolatile food andthat shecent rawouldlbank had weightpumped so much companycalled Tate Publishing & ing programs that pumped tril- Warwick,hesaid, “the public and then presidentofthe Federal Re- energy prices, has been below2% moneyintothe financial systemto Enterprises last month. All are lions of dollarsintothe economy economistshavetoo great an ac- serveBemploymentank of San Francisco, oversaid inflation.for51consecutiv “Lookemonths. at the AFL-CIOrestore the ecspeech.”onomy, it would even- available on Amazon.com. and leftits own$3trillion securi- ceptancethat whatever markets in aspeech. Manyothers, at the time and tually cheapen the dollar’s value “I’m notgetting rich off of it, ties portfolio swollen with mort- do is right.” Three yearsMs.late Yellenr, her fore casimpressedt since, had Mr.predict Obamaed soaring inflawhen- heand soughtpush consumer herpric ades -higher. that’sfor sure,” says Mr.Maloney, gage-backed and Treasurysecuri- Ms.Yellen climbed the Fed has been largely correct, aside tion. Differing views of the econ- While inflation hasn’tmaterial- who is retired from the Air Force. ties. ranks by being methodical rather from afviceew brief aspric aes presidentialpikes for omya ccocandidate,untfor the diff erbutence. theyiz aren’ted, another close,risk is get acting-more He says he is working on asequel. At some point, the next Fed than iconoclastic.She shows up at oil and food. Ms. Yellen strongly emphasizes attention: thatthe Fed’smoney One book with amajor pub- leader will need to use untested policymeetingswith carefully Inflation,cordingas measur toed peopleby the whoslack in knowthe econom them.y. This Whenis the sheprin wasting will nominatedresult notinsoaring lisher,St. Martin’sPress,is“Don’t methods to reversethe process, craftedstatements. Those who Commerce Department’spersonal idea thatwith high unemploy- consumer prices, but in anew as- Messwith Travis” by Bob Smiley, raising interest ratesand siphon- work with her sayshe arrives at consumptionfor Fedexpenditur viceep chairwoman,ricein- ment, empt foryhomes example,and unused she didn’tset bubble havein mark aets face-likestocksor which envisions aTexas governor ing up hugevolumes of cash from the airport hoursearly. dex, was1%inMarch, when com- factory space, companies can’t bonds. driven to secession afterhedis- banks.“They will be learning as During the mid-1990s,then- pared withto-faceayear earlier interview—well be- withraise coMr.nsumer Obama,prices without accordinglos- to people— familJon Hilsenrath- covers afederal plot to siphon off they go,” said LaurenceMeyer,a Fedchairman Alan Greenspan iar with the matter. the state’snaturalresourcesand former Fedgovernor. asked her to take the lead in an ship them to California. Ms.Yellen’ssupporterssay internal Feddebateabout FranciscoFed,Mr.Ms.Y Geithnerellen sounded andFe dwMr.ith Summers,her strong vie byws ,bcontrast,ut nanke, haveas we strongll as inflation “Wewanted to showthe ab- thereare few betterprepared stu- whether to adopt aformal infla- early warningsabout the danger the central bank in the past three hawks—those who worrymost surdities on both sides of the dents. She wasclassvaledictorian tion target. Her preparation im- of aU.S.hWhiteousing bust.House“I still ties.feel Mr.year shGeithneras moved to hasward saidher pr e-he doesn’tabout keeping wantpric thees st able.It aisle,” says Mr.Smiley,atelevi- at Fort Hamilton High School in a pressed others. “She does her the presenceofa600-pound go- scription of sustained aggressive also laid out markersfor unem- sion writer in LosAngeles and middle-classBrooklyn neighbor- homework,” said Mr.Broaddus, rilla in thejob;room, Mr.and Summersthat is the action.is interested, accordingplo toyment peoplerates, which whothe hawks former researcher forthe late hood. Her father wasadoctor her chief adversaryinthe debate. housing sector,” she said at a As Fedofficials deliberated last resisted. William F. Buckley Jr.Ofseces- who worked out of the basement During the discussion Ms.Yel- June 20know07 poli cyhim,meeting but,a hec- declinedApril about toho wlcomment.ong to keep in- Officials haggled over the 531- sion,headds,“It obviously re- of the family’s brownstone.Her len challenged Mr.Greenspan, cording to Fedtranscripts. “The terest rateslow,Ms. Yellen deliv- word document formonths,ac- mains something people in Texas mother,who quit an elementary who wasrarely confronted, to de- risk forfurtherWhilesignific Mr.ant det Bernankeeri- ered a2 doesn’t0-pages peech,appearwith to18 wantcording a tothirdpeople terminvolved in the think could and maybe even school teaching job to raise two fine his views of pricestability, oration in the housing market, footnotes and 15 charts, making discussions.The Feddirectly con- should happen.” children, drovehim to house calls according to Fedtranscriptsand with hoasusep Fedric eschairman,falling and thethe presidentargument that couldratess houldpresstr himols inf tolation stay.through Mr. itsman- Most Texans don’t want to se- and managed the family’s fi- people there. Later, as the econ- mortgage delinquencies rising stay lowuntil 2015 or later.The agement of the money supply,but cede,according to aPublic Policy nances—tucking away savings omystrengthened, she worried further,cBernankeauses me appr saideciable in Marchspeech,l atheer prhadaise dbdiscussedyMr. Ber- hismany plansfactorsi nf“aluenc bit”eunemplo y- Polling survey in January. But and tracking stock prices from the aboutthe booming stock market angst.” with Mr. Obama butnank declinede, presaged toas hifsaytbyt more.he Fed Thement. WhiteOfficials Housewere wa ry of Texans arefond of pointing out afternoon newspaper in small, and also urgedMr. Greenspan to Threemonths later,she fore- toward making clear itsintentions promising toomuch on hiring, that the statefought forindepen- neat handwriting, said Ms.Yel- raise short-term interest ratesto sawadhasn’tangerous disclosedeconomic cas- howto ketheep rapresidenttesdownlong willer than choose.and they struggled to define how denceoncebefore—and won—af- len’sbrother,John. head off inflation—advicehede- cade. previously planned. they would balancejob goals with teraragtagarmyled by Sam “My parentsheld us to high ac- clined,according to Mr.Meyer, “A big woTherryist selectionhat asignifi- involves“She ar moregues ve thanry effectiv politicalely,” inf drama.lation. The Fed Houston defeated Mexican Gen. ademic standards,” said John Yel- her colleague at the time. cant drop in house prices might Charles Evans,president of the Thedocument illustrated Ms. Antonio LópezdeSantaAnna in len, the archaeologyprogram di- Ms.Yellen became chairwoman occur incouldthe cont exbeto enteringfjob losses, anotherChicagoFed periloussaid in an int period.erview. TheYellen’ centralsviewofF banked oper ations. 1836.The short-lived Republic of rector at the National Science of the Council of Economic Advis- and this could lead to avicious “She is constantly asking youto As long as inflation wasrunning Texas joined the U.S. in 1845. Foundation. Afterdinner,here- ersunder President Bill Clinton in spiral ofhasfore pushedclosures,f short-termurther think aboutinterestthe ar ratesgument tothat nearbelo zero,w2%, launchedshe argued, the Fed Most scholars agree that it is called, they listened to radio pro- 1997,aperiod of strong economic weaknessinhousing markets, and youhaveput on the table,espe- could affordtokeep money flow- nowimpossible forany stateto grams,including the adventure growth. She and Clinton adviser further bond-buyingreductions in consumer programscially when thatit pumpedis at varianc trillionsewith ing ,hofelping dollarsbring intodown unem- secede,after the Civil Warand an series,“Sergeant Preston of the Gene Sperling danced with their spending,” she said, at aSeptem- other facts. People look to her ployment. 1869 Supreme Court decision in- Yukon.” hands in the air at a1999 White ber 2007themeeting economy.“Thepot entialand leftand itslisten ownto what $3she’ trillionssaying .”securitiesMs.Yellen portfolioalso pushed for volving Texas that found that the Ms.Yellen gotinterested in House staff meeting in the effectsofthe developing credit While the Fed’ssecond-in-com- morethan ayear behind the nation was“indissoluble.” Still, economics in college. While an Roosevelt Room when the jobless crunch could be substantial.” mand traditionally stands in the scenes foranother step to signal some Texas nationalistscontinue undergraduateatBrown Univer- rate fell near 4%, according to In December,she called on the shadowofthe chairman, Ms.Yel- the Fed’scommitment to low to argueotherwise,and ahardy sity, she wasimpressed with a people at the meeting. Fedtocut interest ratesaggres- len has been outspoken. Mr.Ber- rates, said people involved in the few even meet occasionally at talk by visiting Yale professor, Later, as president of the San sively,accordingTHEto PULITZERFedtran- PRIZEnankew FORas closerNATIONALpersonally AFFAIRSto debat REPORTINGe. In December,following Washing3 ton-on-the-Brazos,where scripts. Mr.Bernankechose a Ms.Yellen’spredecessor,Donald the adviceofher and Mr.Evans, delegates signed the Texas Decla- morecautious approach—until a Kohn, another potential successor, the central bank promised to keep ration of Independencein1836. Taming Inﬂation month later,when conditions who formed abond with the short-term interest ratesnear Alan R. Erwin learned howse- worsened. chairman during the crisis,said zero until the joblessratefalls to riously some took the idea in Change from ayear earlier in consumer prices forgoods and services, Shortly afterthe Fedrescued people whoknowthem. 6.5%, as long as inflation doesn’t 1979,when he wroteapioneering based on the priceindex forpersonal-consumption expenditures Bear Stearns Cos.inMarch 2008, Still, Mr.Bernankeand Ms.Yel- threaten to rise anymorethan a work of Texas secessionist fiction, 12% Mr.Obama—then asenator and len largely seeeye-to-eye. “I can’t half-percentagepoint abovethe “The PowerExchange”—and presidential candidate—called Ms. see amaterialdifferencebetween 2% goal. found that some Texans consid- 10 1Q 2013 Yellen. He wanted explanations of them,” said another central Themoves createaframework ered him the leader of areal revo- the unfolding financial turmoil banker who has seen them often foranexit plan: As the job market lution. Thetruth wasmorepro- 8 1.2% and she wasamong afew people at international meetingsinBasel, improves,the central bank will saic.Mr. Erwin, amember of the 6 he asked, said Austan Goolsbee, Switzerland. gradually stop itsbond buying. state’sPublic Utility Commission, an Obama adviser who arranged Last year,Ms. Yellen ranaFed Later, afterunemployment falls to wasmerely bored. He says he 4 the call. committeethat craftedadocu- 6.5% or lower, the Fedwill start wrotemuch of the novel, released Ms.Yellen, aDemocrat, im- ment detailing howthe Fed raising short-term interest rates. by Texas Monthly Press, during 2 pressed Mr.Obama during a30- viewedits so-called dual mandate, If inflation ticks up,itmight long-winded hearingsconcerning minute conversation as she ex- the central bank’sfocus on both move sooner.Eventually,the Fed Southwestern Bell, the telephone 0 plained the risk of modern-day inflation andunemployment, as could sell some of itsbonds and companyowned by AT&T. –2 bank runs at Wall Street firms setbyCongress. begin soaking up all that cash. “I kept telling them, ‘You need 1960s '70s '80s '90s 2000s '10s spreading likewildfirethrough Thedocument forthe first It will be up to the Fed’snext to read my book,because we Source:Commerce Dept. The Wall Street Journal markets, Mr.Goolsbee said. time made aformal 2% inflation leader to provethe plan will don’t win,’” Mr.Erwin says of the

She has ruffled feathersatthe target, agoal of both Mr.Ber- work. actual secessionists.

P2JW133000-0-A01200-1------XA OW YELL AN CY CK BLA A GENT MA e sit mpo Co BEHIND THE FED CURTAIN

swollen with mortgage-backed and Treasury securities. At some point, the next Fed leader will need to use untested methods to reverse the process, raising interest rates and siphoning up huge volumes of cash from banks. “They will be learning as they go,” said Laurence Meyer, a former Fed governor. Ms. Yellen’s supporters say there are few better prepared students. She was class valedictorian at Fort Hamilton High School in a middle-class Brooklyn neighborhood. Her father was a doctor who worked out of the basement of the family’s brownstone. Her mother, who quit an elementary school teaching job to raise two children, drove him to house calls and managed the family’s finances—tucking away savings and tracking stock prices from the afternoon newspaper in small, neat handwriting, said Ms. Yellen’s brother, John. “My parents held us to high academic standards,” said John Yellen, the archaeology program director at the Na- tional Science Foundation. After dinner, he recalled, they listened to radio programs, including the adventure series, “Sergeant Preston of the Yukon.” Ms. Yellen got interested in economics in college. While an undergraduate at Brown University, she was impressed with a talk by visiting Yale professor, James Tobin, who would later win a Nobel Prize in economics. She decided to pursue an economics Ph.D. at Yale, where her interest in unemployment grew while working with Mr. Tobin, her mentor and dissertation adviser. Mr. Tobin, a child of the Depression and an adviser to presidents John F. Kennedy and Lyndon B. Johnson, emphasized the human toll of high unemployment and the government’s obligation to combat it. He was so impressed with her meticulous notes of his lectures that he asked her to turn them into a textbook. She left to teach at Harvard and didn’t complete the book. Willem Buiter, Citigroup’s chief economist, said Ms. Yel- len’s notes were like the Old and New Testament for Yale Ph.D. students when he studied there in the 1970s. “She was a legend when I arrived at graduate school,” said Richard Levin, Yale’s president, who used them to study in the 1970s. Ms. Yellen went to work on the Fed staff in the fall of 1977, where she met her future husband, economist George Aker- lof. They married the following June. “Not only did our personalities mesh perfectly, but we have also always been in all but perfect agreement about macroeconomics,” he wrote in an autobiography after he won the 2001 Nobel Prize for eco-

THE PULITZER PRIZE FOR NATIONAL AFFAIRS REPORTING 4 BEHIND THE FED CURTAIN

Taming Inﬂation Change from a year earlier in consumer prices for goods and services, based on the price index for personal-consumption expenditures 12% 10 1Q 2013 8 1.2% 6

–2 1960s '70s '80s '90s 2000s '10s Source: Commerce Dept. The Wall Street Journal nomics. Their son, Robert Akerlof, is an economist teaching at the U.K.’s University of Warwick. Her husband is skeptical of markets. In a talk at last year at Warwick, he said, “The public and economists have too great an acceptance that whatever markets do is right.” Ms. Yellen climbed the Fed ranks by being methodical rather than iconoclastic. She shows up at policy meetings with carefully crafted statements. Those who work with her say she arrives at the airport hours early. During the mid-1990s, then-Fed chairman Alan Greens- pan asked her to take the lead in an internal Fed debate about whether to adopt a formal inflation target. Her preparation impressed others. “She does her homework,” said Mr. Broad- dus, her chief adversary in the debate. During the discussion Ms. Yellen challenged Mr. Greens- pan, who was rarely confronted, to define his views of price stability, according to Fed transcripts and people there. Later, as the economy strengthened, she worried about the booming stock market and also urged Mr. Greenspan to raise short-term interest rates to head off inflation—advice he -de clined, according to Mr. Meyer, her colleague at the time. Ms. Yellen became chairwoman of the Council of Econom- ic Advisers under President Bill Clinton in 1997, a period of strong economic growth. She and Clinton adviser Gene Sper- ling danced with their hands in the air at a 1999 White House staff meeting in the Roosevelt Room when the jobless rate fell near 4%, according to people at the meeting. Later, as president of the San Francisco Fed, Ms. Yellen sounded early warnings about the danger of a U.S. housing bust. “I still feel the presence of a 600-pound gorilla in the room, and that is the housing sector,” she said at a June 2007 policy meeting, according to Fed transcripts. “The risk for further significant deterioration in the housing market, with

THE PULITZER PRIZE FOR NATIONAL AFFAIRS REPORTING 5 BEHIND THE FED CURTAIN

house prices falling and mortgage delinquencies rising further, causes me appreciable angst.” Three months later, she foresaw a dangerous economic cascade. “A big worry is that a significant drop in house prices might occur in the context of job losses, and this could lead to a vicious spiral of foreclosures, further weakness in housing markets, and further reductions in consumer spending,” she said at a September 2007 meeting. “The potential effects of the developing credit crunch could be substantial.” In December, she called on the Fed to cut interest rates aggressively, according to Fed transcripts. Mr. Bernanke chose a more cautious approach—until a month later, when conditions worsened. Shortly after the Fed rescued Bear Stearns Cos. in March 2008, Mr. Obama—then a senator and presidential candidate— called Ms. Yellen. He wanted explanations of the unfolding financial turmoil and she was among a few people he asked, said Austan Goolsbee, an Obama adviser who arranged the call. Ms. Yellen, a Democrat, impressed Mr. Obama during a 30-minute conversation as she explained the risk of modern- day bank runs at Wall Street firms spreading like wildfire through markets, Mr. Goolsbee said. She has ruffled feathers at the Fed with her strong views, but the central bank in the past three years has moved toward her prescription of sustained aggressive action. As Fed officials deliberated last April about how long to keep interest rates low, Ms. Yellen delivered a 20-page speech, with 18 footnotes and 15 charts, making the argument that rates should stay low until 2015 or later. The speech, later praised by Mr. Bernanke, presaged a shift by the Fed toward making clear its intentions to keep rates down longer than previously planned. “She argues very effectively,” Charles Evans, president of the Chicago Fed said in an interview. “She is constantly asking you to think about the argument that you have put on the table, especially when it is at variance with other facts. People look to her and listen to what she’s saying.” While the Fed’s second-in-command traditionally stands in the shadow of the chairman, Ms. Yellen has been outspoken. Mr. Bernanke was closer personally to Ms. Yellen’s pre- decessor, Donald Kohn, another potential successor, who formed a bond with the chairman during the crisis, said people who know them. Still, Mr. Bernanke and Ms. Yellen largely see eye-to-eye.

THE PULITZER PRIZE FOR NATIONAL AFFAIRS REPORTING 6 BEHIND THE FED CURTAIN

“I can’t see a material difference between them,” said another central banker who has seen them often at international meetings in Basel, Switzerland. Last year, Ms. Yellen ran a Fed committee that crafted a document detailing how the Fed viewed its so-called dual mandate, the central bank’s focus on both inflation and unemployment, as set by Congress. The document for the first time made a formal 2% inflation target, a goal of both Mr. Bernanke, as well as inflation hawks—those who worry most about keeping prices stable. It also laid out markers for unemployment rates, which the hawks resisted. Officials haggled over the 531-word document for months, according to people involved in the discussions. The Fed directly controls inflation through its management of the money supply, but many factors influence unemployment. Officials were wary of promising too much on hiring, and they struggled to define how they would balance job goals with inflation. The document illustrated Ms. Yellen’s view of Fed operations. As long as inflation was running below 2%, she argued, the Fed could afford to keep money flowing, helping bring down unemployment. Ms. Yellen also pushed for more than a year behind the scenes for another step to signal the Fed’s commitment to low rates, said people involved in the debate. In December, following the advice of her and Mr. Evans, the central bank promised to keep short-term interest rates near zero until the jobless rate falls to 6.5%, as long as inflation doesn’t threaten to rise any more than a half-percentage point above the 2% goal. The moves create a framework for an exit plan: As the job market improves, the central bank will gradually stop its bond buying. Later, after unemployment falls to 6.5% or lower, the Fed will start raising short-term interest rates. If inflation ticks up, it might move sooner. Eventually, the Fed could sell some of its bonds and begin soaking up all that cash. It will be up to the Fed’s next leader to prove the plan will work.

THE PULITZER PRIZE FOR NATIONAL AFFAIRS REPORTING 7