By Zachary Gross ’14, News Editor

On February 3, Janet Yellen assumed office as the 15^th Chair of the Federal Reserve, becoming the first woman in the Fed’s 100-year history to do so.

In order to comprehend the widespread implications of this event, it is critical to understand the Federal Reserve and what it means for the economy. The Federal Reserve serves as the United States’ central bank. It has a dual mandate of stable prices and maximum employment. It achieves these goals by manipulating interest rates by selling or buying bonds. When the Fed wants to lower interest rates, known as ‘loose’ monetary policy, it increases the money supply by buying government bonds from banks. The banks, as a result of this transaction, get money, which then enters into circulation. When the Fed wants to raise interest rates, known as ‘tight’ monetary policy, it sells bonds to banks. By doing this, the money that the banks had is taken out of circulation because it is given to the Fed.

In the aftermath of the Financial Crisis of 2008 and its ensuing recession, then-Federal Reserve Chairman Ben Bernanke instituted a program known as Quantitative Easing. Typically, lowering interest rates would be all that was needed to stimulate the economy, but interest rates were approaching zero and the economy was still in the doldrums. Quantitative Easing flooded financial institutions with capital so that they coud keep lending and keep the economy going during a time of little liquidity. It proved to be effective in staving off a deeper depression, but the policy’s long-term effects remain to be seen.

One of the major challenges Chair Yellen faces is unwinding Quantitative Easing. In the months before Yellen took office, the Federal Open Market Committee, which is composed of governors from the regional Federal Reserve banks and makes policy decisions, decided to reduce the pace at which Quantitative Easing was carried out. Many in finance have dubbed this as the “taper,” and managing this taper appears to be the biggest challenge Yellen faces at the start of her tenure.

Investors had assumed very accommodative monetary policy from the Fed when they invested previously, and signs that the Fed may be slowing Quantitative Easing has raised fears of a sell-off in global markets. Already, the so-called taper has hit many emerging market economies. In these countries, easy money from the Fed fueled their growth. Now that the spigot is slowing, investors are moving back into “safety,” developed nations such as the United States.

One of the ways the Fed could avoid a full-on panic in the market is through increased communication. If investors know what is coming, they are going to be more reasonable with their investments. Chairman Bernanke is well known for increasing the transparency of the Fed during the course of his tenure. He broke tradition and was interviewed by 60 Minutes during the heart of the financial crisis. But more notably, he has given very clear forward guidance to the markets by assuring investors interest rates will remain near zero until unemployment falls below 6.5% or inflation rises above 2.5%. With the unemployment rate down to 6.6% in January, it is going to be up to Yellen on how to communicate the Fed’s next steps. Jai Ghose ’14, president of the Young Republicans club, added, “Janet Yellen’s biggest challenge is winding down Quantitative Easing in such a way that promotes stable economic growth without causing excess inflation. Concomitantly, she must maintain a consensus among the Fed Reserve Board, and continue to clearly communicate its message. Winding down QE as is planned, tapering, seems to be the best course of action.” Eric Schwed ’14, co-president of the Young Democrats club and president of the Mi Casa club,  was strongly in support of her nomination. He added, “I think from what I’ve read about her background, she is completely qualified for the job. I also happen to agree with her ideologically.”

The fact that she was the first woman to be selected for the job drew praise from all corners. Ghose said, “Yellen’s nomination marks the progress of females in typically male-dominated fields. Let Yellen be an inspiration for young women everywhere; a woman can do anything that a man can.” Schwed added, “I think it’s great. I don’t think that it is the only reason she was appointed. She was qualified regardless of her gender.” Tyler Dohrn, the other co-president of Young Democrats, was equally in favor of Yellen’s nomination. “This is a major moment for gender equality. It is refreshing to see qualified women in this day and age get the positions they deserve,” he said.

To Yellen’s credit, she has already begun to increase the transparency the Fed has with the public. On February 11^th, during her testimony to Congress, Yellen agreed to answer questions from all 60 members of the House Financial Services Committee, something a Fed chair had never done before.

With deflation a creeping threat in the Eurozone and worries of a slowdown in China jangling markets, it is certainly going to be a trial by fire for Yellen in her first year as chair of the Federal Reserve.