What’s Ahead for the Federal Reserve?

In a recent Knowledge@ Wharton article, Wharton finance professor Krista Schwarz mentions a crucial point that may make Janet Yellen just the person to lead the Federal Reserve: The Fed’s dual mandate is to ensure price stability and maximum employment.

Therefore, while Yellen will obviously need to decide when to start winding down the Fed’s massive bond buying program initiated by Chairman Bernanke, she must also deal with ongoing unemployment, an area where she has significant expertise.

While Bernanke’s academic career was spent studying the Great Depression, Schwarz notes, “Yellen’s research has focused on the cost of long-term unemployment and the danger of a high unemployment rate, making a problem that’s cyclical turn into one that’s structural.” In fact, Yellen also has co-authored studies with her husband, Nobel Prize winner George Akerlof, on the role of monetary policy in stimulating employment growth.

According to Schwarz, the Federal Open Markets Committee (FOMC), the Fed group that sets monetary policy, has generally viewed unemployment as structural and beyond the purview of monetary policy. She speculates, however, that Yellen may be more inclined to believe that “cyclical elements are at work and that accommodative monetary policy can positively impact unemployment.”

Concern over the labor market caused the Federal Reserve to decide earlier this year against beginning to taper quantitative easing. And Yellen’s reputation as a “monetary policy dove” certainly points to a slow tapering of Uncle Sam’s bond-buying spree. We’ll have to wait and see how that impacts unemployment.

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