Yellen’s Path From Liberal Theorist to Fed Voice for Jobs

The decision not only attracted a series of excellent sitters, it also inspired the couple, both professors at the University of California at Berkeley, to develop a new theory of the labor market that remains an influential justification for the Federal Reserve’s ability to stimulate job growth.

Employers, they asserted, often seek to improve morale by paying more than the minimum necessary wage, which has the effect of preventing some people from finding jobs. And during periods of high unemployment, they said, monetary stimulus can increase demand for labor – a direct rebuttal to the classical view, which left little role for the Fed in combating unemployment.

Thirty years later, Ms. Yellen and the debate about the Fed’s abilities have both moved from the theoretical world of academia to the Fed itself. As the central bank’s vice chair since 2010, she has pressed for stronger measures to reduce unemployment, battling the doubts of other Fed officials about the value of continuing to expand the Fed’s enormous stimulus campaign.

Ms. Yellen, 67, now finds herself as President Obama’s nominee to succeed the Fed chairman, Ben S. Bernanke, at the end of January, largely because many Democrats view Ms. Yellen as the best person to press that stimulus campaign and to strengthen financial regulation. Senate Democrats prevented the nomination of President Obama’s first choice, Lawrence H. Summers.

For Ms. Yellen, who was drawn to study economics as a path into public service and aspired as a college student to work at the Fed, the top job at the central bank would be a logical if – until only recently – unexpected culmination. Her confirmation also would reinforce the Fed’s evolution from an institution run by market-wise bureaucrats focused on controlling inflation to an institution run by academics committed to a broader mission of steady growth and minimal unemployment.

Ms. Yellen’s intellectual roots and leadership style both suggest that she would push somewhat more forcefully than Mr. Bernanke to extend the Fed’s stimulus campaign, according to a careful review of her career and interviews with more than two dozen colleagues and acquaintances.

She has expressed greater concern about the economic consequences of unemployment, a stronger conviction in the Fed’s ability to stimulate job growth and a greater willingness to tolerate a little more inflation in order to reduce unemployment more quickly. Until recently, her emphasis on unemployment would likely have disqualified her for the job, and it has already inspired opposition from some Senate Republicans and investors concerned that she would not be sufficiently vigilant in guarding against inflation.

Ms. Yellen is also a more assertive leader than Mr. Bernanke and appears less averse to conflict. While both encourage open debate and seek to make decisions by consensus, Ms. Yellen has been a more vocal and persistent advocate for her own views. Mr. Bernanke has allowed Fed officials to air their views freely, while Ms. Yellen has expressed concern that the cacophony undermines the Fed’s effectiveness by sowing confusion about the direction of policy.

“I think she is fundamentally committed to continuity, that we still have a problem and we still need monetary policy to be doing a fair amount,” said Christina D. Romer, a former chairwoman of Mr. Obama’s Council of Economic Advisers and a close friend of Ms. Yellen. “There’s a toughness there. And I think there’s a toughness to her that there isn’t in Bernanke.”

Yet it is easy to overstate the changes Ms. Yellen likely would bring. She would be the first Democrat to lead the Fed in nearly three decades, but a liberal central banker is something different from – and more conservative than – a liberal politician. She was instrumental in the Fed’s decision last year to declare a target of 2 percent annual inflation, and has shown only a very limited willingness to tolerate higher inflation.