Janet Yellen Will Mean Low Interest Rates, Stability in Fed Policy

Janet Yellen may be the first woman nominated to head the Federal Reserve. But her candidacy is hardly a game-changer in other ways. With Yellen at the helm, the Fed is expected to continue its policies of quantitative easing, meaning interest rates could stay low for some time to come. Yellen is thought to be heavily concerned with keeping unemployment low. Our panel of bank attorneys weighs in on what to expect out of the Federal Reserve under Yellen’s leadership.

Do you think Janet Yellen will be good for banking?

Janet Yellen has been involved in one way or another with the Fed since 1994. She brings a wealth of knowledge about the interworkings between the Fed, the banking sector and the economy. She played a large role in the development of Fed response to the financial meltdown and the post-Dodd Frank rules. I would not anticipate any major mid-course changes by the Fed with her at the helm which means that the Fed will continue to focus on bringing the unemployment rate down as opposed to being fixated on the inflation rate. She will continue the focus on banks having sufficient capital to withstand the shocks of an economic downturn. At the end of the day the answer to our current doldrums is getting the economy moving to the point where the unemployment rate has dropped to the point that people feel comfortable spending and borrowing again. All boats, including the banking sector, will rise when we get to that point and she understands that.

—Gerald Blanchard, Bryan Cave LLP

“Steady as she goes” is likely to be Janet Yellen’s approach as Fed chair[man]. She will continue the push for greater transparency, reducing credit risk and the risk of runs on financial firms. Like Bernanke, she is a former academic with excellent credentials, and, based on her speeches, she hopes that keeping short-term rates low will spillover to long-term rates, raise asset values, and stimulate demand. Good for banking? Yes. But then there’s our financial mess: out-of-control tax and spending policies, elected officials who don’t understand balance, balance sheets, or balancing a checkbook, and our inability to afford even the interest on our national debt. The Fed is printing money, buying $85 billion in Treasuries and mortgage-backed bonds every month, and keeping interest rates low to stimulate our economy. The time to pay the piper is coming. Yellen’s challenge: Can she steer monetary policy back towards normalcy without precipitating another crisis? This is an unenviable task.

—Keith R. Fisher, Ballard Spahr LLP

Shattering another glass ceiling, when she becomes the first woman to chair the Federal Reserve Board, Janet Yellen, many hope, will become the economic recovery’s Rosie the Financial Riveter. Her nomination by President Obama was greeted with industry support (and relief, considering some of the alternatives). She is a pragmatic and steady economist, highly experienced in statecraft and focused on the importance of job creation. Yellen is expected to continue the easy money policies of her predecessor until unemployment rates normalize and the recession is in the rearview mirror. Her stewardship over monetary policy and bank regulation will provide the industry with a stable post-Bernanke environment and the time to gain further strength while girding against the challenges of Basel III and the implementation of the Dodd Frank Act.

—Mark V. Nuccio, Ropes & Gray LLP

The nomination of Janet Yellen to chair the Federal Reserve Board is a triumph for economics over politics. The wide perception was that [the other candidate] Larry Summers was too driven by political winds, and therefore, was less likely to adhere to a consistent philosophy. In the short term, however, Yellen’s adherence to qualitative easing is likely to mean that the Fed will be slow to wean itself from asset purchases with the result that market interest rates will remain slack. Consequently, banks can be expected to continue to suffer deteriorating net interest margins. Moreover, Daniel Tarullo is expected to continue his primacy over banking regulation and supervision. Thus, for bankers, the change at the top of the Fed might feel like Groundhog Day.

—Peter Weinstock, Hunton & Williams LLP

She certainly has the requisite experience to be the next chair[man] of the Federal Reserve Board, and her role as president of the San Francisco Fed during the height of the economic crisis undoubtedly gave her extensive experience in the nuances of banking supervision. Many of our clients are hoping that she continues the Federal Reserve’s heightened sensitivity to the impact of overregulation on our nation’s community banking organizations. The establishment of the Fed’s Community Depository Institutions Advisory Council and its recent Community Banking Research Conference are positive steps in that direction. A continuing client concern, however, is the extent to which the Fed will give banking organizations the flexibility to navigate out of the difficult financial positions in which many find themselves, through rightsizing enforcement actions and otherwise allowing these organizations to develop creative capital raising options to improve their condition.

—John M. Geiringer, Barack Ferrazzano Financial Institutions Group