Humanity of new Fed chair bodes well for SA

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IOL pic feb12 janet yellen testimony Associated Press Federal Reserve Chair Janet Yellen listens while testifying on Capitol Hill in Washington on February 11, 2014, before the House Financial Services Committee hearing. Yellen said that if the economy keeps improving, the Fed will take "further measured steps" to reduce the support it is providing through monthly bond purchases. Picture: Cliff Owen

Janet Yellen will change your life. She holds the value of your currency at her fingertips and this year is most certainly going to change it. She has more control over US inflation, employment, growth and the value of the dollar than any other single person.

When the president of the US is elected, the world holds its breath, knowing full well that the head of the world’s largest army and largest economy is able to change what happens at their back door.

But there is another election that goes largely unnoticed; that of the chair of the US Federal Reserve (the equivalent to South Africa’s Reserve Bank) and this year’s award goes to Yellen – the first woman to ever hold the post.

Yellen is a likeable character and is well known for her unorthodox, non-ivory tower thinking. Unlike her predecessors she takes comfort in dining with the rest of her colleagues in the Fed cafeteria and this compassion and humanity reflects in her economic philosophies.

She has been referred to in Time magazine as somebody who puts things in “human terms”, has received numerous awards from Haas School of Business for being an outstanding teacher, and holds income inequality as a primary focus.

Yellen is a strong advocate of behavioural economics: a branch of economics that recognises that traditional theory based on rationality is often wrong if emotions are not taken into account. Among policy circles she is referred to as a “dove” – a patronising term referring to her preference to focus on employment creation rather than keeping inflation low. Low inflation and high employment are often mutually exclusive and those who prefer to focus on conservative inflation regardless of the cost in jobs are called “hawks”.

But her preference for the softer side of economics in no way means she will be soft herself. She has her work cut out for her.

Her first public address to Congress on Tuesday revealed no surprises. She was part of the committee that, under the leadership of then Fed chair Ben Bernanke, engineered the quantitative easing policies during the recession and subsequently decided to cut back on monthly purchase of bonds this year. As expected, Yellen plans to continue with this policy, slowly reducing purchasing from the current level of $65 billion (R719bn) a month to possibly zero by the end of the year.

Under Yellen’s leadership, this depends on one crucial indicator: US unemployment. If recovery does not take place fast enough it is likely she will stick to her guns and keep interest rates low until the time the US economy is back on stable ground.

What does this mean for you?

Economic recovery in the US is going to be slow but near certain. Yellen has the interests of the American people at heart and will not support brash and risky policies in the interests of short-term returns.

This year will bring depreciating pressure on emerging market currencies as the dollar gains strength from the tapering of the Fed’s bond buying, but if Yellen leads the US to a stable recovery and holds true to her focus on employment, the benefits will soon flow over to the world economy.

While Yellen may accept higher inflation as a necessary sacrifice for higher growth, both bode well for South Africa – US demand for resources and consumer goods will increase at the same time as the competitiveness of domestic prices decreases.

Janet Yellen will change your life, but it may be for the better.

* Pierre Heistein is the convener of UCT’s Applied Economics for Smart Decision Making course. Follow him on Twitter @PierreHeistein


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