Janet Yellen would be the best possible Fed Chair if we do not want a monetary policy regime shift. But we do want a monetary policy regime shift:
Why Christina Romer Should Be the Next Fed Chair: The Fed hasn't really tried a regime shift this time. Instead, it's been a series of what Romer calls "incremental changes." First, it was QE1 to prevent the end of the financial world as we knew it; then it was QE2 to prevent deflation; then it was Operation Twist to push down longer-term interest rates; then it was QE3 to push down unemployment faster. Now, QE3, with its open-ended bond-buying, is the closest the Fed has come to shifting regimes, but it's only been a half-step. A real regime shift would mean targeting higher inflation or nominal GDP -- but the Fed hasn't increased its inflation projections above 2 percent even with QE3. That's not a new day. That's pretty much the same-old day, just with bond-buying.
But it's not easy to start a new day. The Fed can't just say it's a new day. The Fed has to show it's a new day -- and keep showing it. In other words, it can't look back on the monetary world that was. Now, the Fed has had its own Orpheus-moment recently with its tapering talk. It's reversed even its QE3 half-step by saying it thinks it will reduce its monthly bond purchases soon. As Paul Krugman points out, it's not about the economic consequences of the taper. It's about the reputational consequences. It shows the Fed is still a conventional central bank looking for any excuse to stop its bond-buying even though the fundamentals don't justify it. That's why markets have pushed up interest rates despite the Fed saying it won't do so. If the Fed will taper when the data says it shouldn't, why wouldn't it raise rates when it said it wouldn't?
The only way the Fed will give us a new day is with new thinking. Fed number two Janet Yellen is the odds-on favorite to replace Bernanke, and would be a very good choice, but Christina Romer would be a better one. Now, Yellen has been quietly pushing the Fed to evolve towards a quasi-NGDP target, but doing so quietly half-defeats the point. Romer understands you have to scream it -- and back it up -- to get people's attention. And you have to keep screaming it -- and keep backing it up -- until it's just background noise.
Extremism in pursuit of recovery is no vice. It's necessary.