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Yellen’s first year as head of the Fed shows determination – and limits

WASHINGTON – In her first speech as chairwoman of the Federal Reserve, Janet L. Yellen told the stories of three people looking for work.

“It is my hope,” Yellen said in that Chicago speech, delivered in late March, “that the courageous and determined working people I have told you about today, and millions more, will get the chance they deserve to build better lives.”

As Yellen approaches her first anniversary atop the Fed, the course she is charting illustrates both her determination to make jobs more readily available – and the limits of that pursuit, which are to some extent self-imposed.

Under her leadership, the central bank has effectively expanded its stimulus campaign. It has done so by standing still, leaving its plans unchanged even as unemployment has declined much more quickly than its officials had expected.

At the same time, Yellen has made clear that low borrowing costs cannot address all of the problems preventing Americans from finding jobs, and that she is not willing to test whether higher inflation might lead to greater economic growth.

In this conventional approach, Yellen has maintained a considerable degree of continuity with her predecessor, Ben S. Bernanke.

“I think Ben and Janet would have worked it about the same way so far,” said Jon Faust, an economist who served as a special adviser to the Fed’s board until September, when he returned to a position as a professor at Johns Hopkins University. “Their philosophies, their underlying view of macro, their view of the limits of policy – those views are, in what I observed, remarkably similar.”

But both Fed officials and outside experts say that Yellen is likely to more distinctly define her own approach next year as the Fed picks its moment to start raising its benchmark interest rate for the first time in almost a decade.

Since Yellen took over, the Fed has gradually ended its bond-buying campaign while pointing steadily to mid-2015 as the most likely timing for a first rate increase. The steady pace of the retreat owed much to an economic recovery that finally met the Fed’s expectations after several rounds of disappointed hopes.

“We’re continuing with the path that they both laid out as Ben was leaving,” said Charles L. Evans, president of the Federal Reserve Bank of Chicago.

Still, Alan S. Blinder, an economics professor at Princeton University and a former Fed vice chairman, said maintaining that sense of stability was harder than it looked.

He pointed out that the Fed had managed to almost completely rework the content of its official statements about the likely timing of the lift-off from zero without shifting the expectations of investors, a feat akin to rebuilding a ship without benefit of a dry dock.

When Yellen was sworn into office in early February, Fed policy was directly tied to the unemployment rate.

The Fed had declared its intention to keep its benchmark rate near zero at least as long as unemployment was above 6.5 percent.

By the time unemployment fell below that threshold two months later, the Fed had instead declared its intent to keep rates near zero for a “considerable time” after the end of its bond-buying campaign in October. This month, the Fed replaced that language with a promise of “patience.”

With each change, Yellen insisted – and markets accepted – that the timing had not changed.

“A substantial part of the story of Yellen’s first year is how she deftly navigated through changes in language in the forward guidance,” Blinder said. “I thought it would be a hard job – it was so embedded in expectations – but she just slid right by it. And things that go incredibly smoothly often don’t get noticed.”

Yellen has worked hard to govern by consensus, her colleagues say, layering phone calls and planning meetings before each formal meeting of the Federal Open Market Committee, which sets monetary policy, largely during a series of eight meetings spread over the year.

Whereas the former Fed chairman Alan Greenspan generally spoke first, to frame the discussion, Yellen has adopted Bernanke’s practice of speaking last and summarizing the discussion.

Still the Fed’s steadiness is drawing increasingly sharp criticism from advocates from both sides, those counseling either more or less patience.

At least one Fed official has dissented at five of the seven policymaking meetings so far. At the most recent meeting, in December, three officials dissented for only the second time since 1992.

Some officials, including Fisher, along with some outside economists and congressional Republicans, argue that the Fed is inflating and destabilizing financial markets, and that faster job growth means the Fed should retreat more quickly.

The former Fed chairman Paul A. Volcker questioned at a conference in November why the Fed would ever seek to increase the pace of inflation.

Other officials, along with a wide array of outside economists, are disappointed that Yellen has not pushed harder to raise inflation as a means toward faster job creation and higher wages. Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, last week sharply criticized as “unacceptable” the Fed’s “failure” to increase its efforts.

Peter Ireland, a professor of economics at Boston College, says Yellen has gotten the policy just about right. “I think she deserves credit for resisting pressures to overreact on both sides,” he said.

He noted that Yellen had correctly judged that a rough first quarter was an aberration caused by cold weather. More recently, he said he agreed with the Fed’s judgment that inflation was likely to increase if the economy continued to grow.