Janet Yellen's defining moment

Dr Janet Yellen
Dr Janet Yellen

Dr Janet Yellen (right) made history last year when she became the first female head of the US Federal Reserve, the most powerful central bank in the world. She made history again last week when she led the Fed to make its first rate hike in almost a decade.

But unlike her more famous predecessors - think Mr Alan Greenspan and even Mr Ben Bernanke - not much is known of the woman who called an end to the era of cheap money that kept the US economy - and by extension, the world economy - afloat following the global financial crisis.

Janet Louise Yellen was born in 1946 in Brooklyn, New York. Her father was a family doctor; her mother a schoolteacher who stayed home to raise her and her brother John, but kept an interest in finance.

Each year in her high school, the editor of the student newspaper interviewed the class valedictorian. The young Janet was both, so she interviewed herself.

She won a place to study mathematics at Brown University, but quickly changed to economics because it was more practically useful.

"She took her first economics course and came home and gave me the one-hour lecture on why economics was the greatest thing going," childhood friend Susan Grosart told The New York Times. "It was pretty obvious from then on that that was her passion."

At Yale for her doctorate, she studied under Nobel laureate James Tobin, famous for his view that government policy can lift an economy out of a recession. She sees him as her "intellectual hero".

After six years as an assistant professor at Harvard, Dr Yellen went to work as an economist with the Fed board of governors in 1977 and met Professor George Akerlof, a fellow economist, over lunch. Within a year, they married, resigned from the Fed and went to teach at the London School of Economics (LSE).

Lord Desai, emeritus professor of economics at LSE, told the BBC: "George Akerlof is a complete genius - an economist who is always thinking out of the box. Janet was a very serious person and a very good economist. But I think at the time people underrated her as she was 'just' George Akerlof's wife."

Prof Akerlof would go on to win the Nobel Prize in economics in 2001. But the couple were never rivals. When her career took off, Prof Akerlof took leave from his job to stay home with their son Robert, now an assistant professor in economics at the University of Warwick in Britain.

Dr Yellen's big break came in 1994 when she was appointed to the Fed's board of governors. There she convinced her boss, Mr Greenspan, that the Fed should not seek to eliminate inflation completely as it would do more harm than good. The Fed would go on to adopt 2 per cent inflation as its target.

The self-described "pragmatic, mainstream economist" was then appointed by then President Bill Clinton to chair his Council of Economic Advisers in 1997.

The global financial crisis hit while Dr Yellen was president of the San Francisco Fed Bank.

She had been one of the first in the Fed to describe rising housing prices as a dangerous "bubble".

In the weeks after the collapse of US investment bank Lehman Brothers at the peak of the crisis in 2008, she was the first Fed official to say the US had entered a recession.

"She was one of the people that did raise alarm bells, but I think like many others who saw the problems coming, she did not anticipate the magnitude of the difficulties," according to Prof Joseph Stiglitz, the economist who shared the 2001 Nobel Prize with Prof Akerlof.

The question now for Dr Yellen is if she has correctly anticipated the consequences of ending an era of rock-bottom US interest rates. This action and how it plays out will define her life's work.

Prof Stiglitz is among critics who argue that the move is dangerous and premature because the US recovery is anaemic, and emerging markets are weak and debt-ridden.

Luckily, for someone taking on the most delicate economic job in the world, Dr Yellen, now 69, has shown that she is unlikely to panic in a crisis. "We were in the same room during the huge 1989 earthquake which hit San Francisco," her former colleague, Professor Andrew Rose, recalled.

"We thought the building was going to collapse and I was convinced we were going to die. But Janet just stayed remarkably calm during the whole thing."

A version of this article appeared in the print edition of The Sunday Times on December 20, 2015, with the headline 'Janet Yellen's defining moment'. Print Edition | Subscribe