Why Janet Yellen Will Craft the Greatest Fedspeak Ever

NEW YORK ( TheStreet) -- Call it a gift of Fedgab, because Janet Yellen has it.

Former Federal Reserve Chairman Alan Greenspan was known for his so-called Fedspeak, which was a term often used about the central banker when he was intentionally ambiguous communicating Fed policy to markets.

It was a tactic that current Chairman Ben Bernanke jettisoned as the U.S. economy rebounded from the worst recession since the Great Depression, particularly to communicate to fragile global markets how the Fed was supporting the recovery.

"That is the virtue, I think, of Yellen," said David Weiman, an economics professor at Barnard College.

Economists and analysts in interviews about Yellen, who President Obama nominated on Wednesday to be Bernanke's successor, said one of the central banker's strongest qualities is her ability to clearly communicate complex monetary policy.

Throughout her years as the San Francisco Fed president and as the vice chair of the Board of Governors, Yellen has delivered speech after speech that avoids typical Fed jargon. Before her Fed days, Yellen wrote with economist Alan Blinder about the macroeconomic lessons during the Bill Clinton presidency, called "The Fabulous Decade."

"It's extremely well written, it's thoughtfully analyzed and it actually conveys a sophisticated message and it does so in terms that the educated layperson can certainly understand," said Weiman.

As an example of her ability to explain difficult subjects, Yellen on April 16, 2009, during the throes of the recession, delivered a speech about asset bubbles and the work of Hyman Minsky. Minksy's research focused on financial crises, and it was better-known for addressing "asset price bubbles."

Yellen weaved through the speech agreeing and disagreeing with the assessment that central banks should always act to prevent the formation of asset bubbles.

"[B]ursting bubbles can seriously harm economic performance, and monetary policy is hard-pressed to respond effectively after the fact. Therefore, central banks may prefer to try to eliminate, or at least reduce the size of, this threat directly," Yellen said.

She then discussed how new financial instruments that started the 2008 financial crisis were difficult even for central bankers to identify.

"This created a new wrinkle that even Minsky may not have imagined. Some of the investors who put money into highly risky assets were blithely unaware of how far out on a limb they had gone. Many of those who thought they were in the hedge category were shocked to discover that, in fact, they were speculative or Ponzi units," Yellen said.

The speech effectively described the troubles that triggered the financial crisis, without spiraling into the weeds of credit spreads, derivatives trades and exotic mortgages.

A central characteristic for the next Fed chair will be clearly describing the Fed's dual mandate of full employment and low inflation. Specifically, market participants and everyday Americans will look to Yellen to address the 6.5% unemployment rate and 2% inflation rate the Fed considers as "thresholds" to end to its current economic stimulus program.