Is Janet Yellen the Best Candidate for Vice Chair of the Fed?

San Francisco Federal Reserve Bank President Janet Yellin is Obama's nominee for Vice Chair of the Federal Reserve Bank.  Why this policy dove may be a perfect short term answer, and a long term disaster.
Mission
The primary role of the Fed is the pursuit of maximum employment and price stability.  Sounds simple.
It's anything but.
I.  Maximum Employment
To pursue the goal of full employment, the Fed must make business conditions favorable to hiring.  That means that businesses must be able to borrow easily, expand and hire employees to facilitate such growth.  As you know, banks must keep a certain amount of their deposits with their local branch of the Federal Reserve Bank in order to have sufficient liquidity to prevent panics that contributed to the Great Depression.  When short term interest rates are low, banks can more freely lend to businesses because they don't have to keep as close an eye on their cash reserves.  Money's cheap.
When rates rise, banks keep a tighter rein on lending by strengthening borrowing standards.  It's harder to get a loan, business expansion slows and jobs are harder to get.
Why not have a continuing policy of low interest rates?
II.  Price Stability
Price stability is another way of saying low inflation.  Inflation is the amount prices go up every year.  Anyone who lived through the 1970s remembers that prices rose much faster than wages.  Every year our same dollars bought less and less. 
When inflation takes hold, it's hard to stop.  People want more money to afford what they could afford last year.  If they get raises, however, their businesses have to raise prices to cover higher payroll costs, so costs rise.  A vicious circle ensues, where labor wants raises and businesses want higher prices.  What stops the circle?  A recession, when businesses lay off workers and can contain prices.  The higher inflation, the more prolonged the recession.
The problem is, during the recession, the Fed is pressured to lower interest rates to stimulate the economy.  But, r
Once inflation takes hold, it's very hard to stop.
A Dovish Policymaker
Janet Yellin is described as an inflation "dove."  That means that her decisions have been "growth and employment" oriented and less focused on containment of inflation.  You may think, that with unemployment rates hovering in the double-digits, this is just what we need.  Certainly, that political opinion would be currently popular.  But, would it be a good long term policy?
Deficits and Inflation
No reputable economist of whom I'm aware would not have advised deficit spending to stimulate the economy during the last recession.  It was a necessary evil that prevented the country from likely sinking into a Depression.  But historically, the relationship between deficit spending and inflation is problematic.
Generally, when government borrowing increases, the amount of funds that remains for businesses and individuals to borrow decreases, and the competition for these fewer dollars causes rates to increase. 
So-called inflation "doves," who generally advise keeping rates low, can accommodate both government and business lending only by printing more money for the government to buy its own debt, causing the money supply to expand and debt to contract.
Expanding the money supply is inflationary.  Instead of raising taxes to pay its debt, printing more money makes the dollar less valuable.  The cost of everything goes up when your dollar is worth less.
The Federal Reserve Board of Governors
At its last meeting, only one Fed governor, that of St. Louis, voted against keeping interest rates low.  The majority (11 members) voted to keep rates low because their perception that the risk of sinking back into recession was more significant than the threat of inflation.  Dr. Bernanke, current Fed chairman, is considered one of the premier scholars of the Great Depression.  One significant factor in its length is thought to be insufficient economic stimulus.  It is a mistake about which Bernanke argues eloquently, and apparently the majority of the board agrees.
With a propensity of more dovish members, however, it is of some concern that one who has been one of the most consistent would be considered as the Vice Chair.  Generally, upon the retirement or failure to reappoint the Chair, the Vice Chair is likely to assume this influential post.
At a time when deficit spending is so high, the national debt is ballooning and the nation only recently stepped back from the brink of Depression, is it wise to choose a member who is so dovish about inflation that she stated last February, "If it were possible to take interest rates into negative territory I would be voting for that."?
Perhaps a candidate with a more balanced approach to the Fed's dual mandate would be a more reasonable decision.

The Case For (and Against) Raising Interest Rates

One of the Federal Reserve Bank's most powerful tools is raising short term interest rates.  Why they should (and why they shouldn't) do just that now.
Short Term Interest Rates
Didn't the Fed just raise rates?  Yes, they raised the Discount Rate by 50 basis points (1/2%).  The Discount Rate is the rate that the local branch of the Federal Reserve Bank charges for short term loans.  There are three types of loans available from the "Discount Window."
There is also the Fed Funds Rate, which is the rate banks lend money to each other at the local branch of the Federal Reserve Bank, in order to meet the reserve requirements they must set aside for liquidity purposes.  This rate, currently .25%, was set on December 16, 2008, during the recent financial crisis.
Extraordinary Measures
The Federal Reserve undertook several extraordinary measures to assist financial institutions during the recent the financial crisis. Besides providing loans to banks through the discount window lending programs referenced above, the Fed established other ways to provide liquidity to financial institutions, including:

• Term Auction Facility,
• Primary Dealer Credit Facility, 
• Term Securities Lending Facility,
• Commercial Paper Funding Facility,
• Money Market Investor Funding Facility,
• Term Asset Backed Loan Facility, and 
• Section 13(3) of the Federal Reserve Act loans to support specific institutions to avert their disorderly failures.

In short, the Fed became "the lender of last resort," after effectively lowering the Fed Funds rate to zero.
Now, by most measures, the liquidity crisis has been averted, and many of the programs listed above have been suspended.  Some economists feel that it is now time for the Fed to raise the Fed Funds rate and unwind other extraordinary credit facilities, and some feel that it should wait.  Here are the pros and cons.
Raise Rates Now
Those in favor of raising rates now generally feel that by raising rates gradually, the economy will avoid creating future excesses like inflation caused by holding rates artificially low.  This position represents the free market philosophy that the economy must move through the process of recovery without intervention by the Fed. 
Such economists see the 3% - 3.5% projected US growth in Gross Domestic Production this year partially due to previously provided economic stimulus, but more importantly through sustainable growth in global demand.  Acknowledging the problem of high unemployment rates, they think that potential problems created by guaranteeing low rates for the foreseeable future will create more serious economic excesses in rate sensitive sectors in the future.  In effect, this policy is seen as "postponing the inevitable," and proponents of this philosophy favor no economic intervention unless absolutely necessary.
Keep Rates Low
Those in favor of keeping short term rates near zero generally agree with the 3% - 3.5% projected US growth in Gross Domestic Production this year, but feel that reliance on growth in global demand is more precarious.  Citing recent concerns with the sustainability of the current recovery, including high rates of US unemployment  and sovereign debt risk abroad, proponents of this philosophy feel that Fed intervention will lessen the risk of slipping back into recession, and see that risk as more probable than creating inflation by keeping rates artificially low.
Weighing the Probabilities
Those who participate in this discussion often do so by labeling their opinion as "capitalist" or "progressive."  To do so is to grossly oversimplify the issue.  Whether rates should be raised or not lies simply in the measurement of future global demand.  Should demand be sufficient to sustain US growth, then interest rates should be raised, and the growth in production will result in new hiring that will eventually lower unemployment.  The amount of projected global growth in 2010 depends upon whose data you rely.
The World Bank projects 2.7% growth this year, slightly more pessimistic than the International Monetary Fund's projection of 3%.  The two organizations use different methods in calculating GDP, which partly accounts for the disparity.
For comparison purposes, global GDP growth was 5% in 2004, 4.5% in 2005, 5.1% in 2006, 5.2% in 2007, 3% in 2008, and -1.1% in 2009. 
Those in favor of raising interest rates feel that relying on growth from global demand projections in an admittedly sub-par year present less risk than the potential inflationary excesses that may be caused by keeping rates low.
Those in favor of keeping rates low feel that the probability of damaging a fragile recovery by raising rates are higher than causing future inflation by not doing so.
Clearly, choosing the wrong course of action may result in significant economic problems. 
What is your opinion, and why?