The takeaway from new Federal Reserve chair Janet Yellen's remarks before the House was that she would be just like Ben Bernanke. It's just not true; in fact, it's not possible.
Yellen's testimony paved the way for this conclusion. She spoke of the continuity in policy, reminding us that she has been a member of the Federal Open Market Committee and the board of governors during this difficult period and had been one of the architects of that policy herself.
However, we question why Yellen and Bernanke were on the same page so often. Are they really same-minded soulmates or is ... was … there something else going on?
(Read more: The market loves Yellen—but for how long?: Polcari)
Looking back, I would label Bernanke as a cyclical dove. His dovish nature about policy developed after a career of studying the Great Depression and what went wrong. He concluded that the main policy mistake was to remove stimulus too soon. The thrust of policy under Bernanke was to make policy stimulative and to keep it stimulative for a long time — beyond normal tolerance.
This is not an ideology but a policy formed after many hours of academic study. Even after substantial investigative efforts by reporters while Bernanke was chairman, no one was able to pin down Bernanke's political proclivities. He simply wasn't an ideologue.
In contrast, Yellen is a Democrat. Democrats believe in the inefficiency of economic systems and in the rightful role of government intervention. I think of Yellen as a structural dove. She and Bernanke were on the same page because of the state of the economy. As we go further down the road and as we put more distance between ourselves and the financial crisis, it is likely that the policy will fork in the road will come and that Yellen will go one way and that Bernanke would have gone the other.
(Read more: Yellen just added pressure on emerging markets)
This doesn't mean I know exactly what Janet Yellen will do. And let's remember that by labeling her as a Democratic that does NOT mean she will naturally be an "easy money" person. Let's remember that Jimmy Carter, a Democrat, eventually appointed Paul Volcker, another Democrat, to lead the Fed. History remembers Volcker as one of the most anti-inflation chairman in history. So much for stereotypes ...
However, in considering Yellen's likely course of action, the message is that it is not just ideology but also the demands of the economy that matter. When Paul Volcker took over, the demands of the economy were clear. The path for the Fed also was clear. For Janet Yellen that is far from true.
Not only that, but it's no longer true that the policies of Bernanke, Yellen and other FOMC members are relevant for today. As we progress in recovery, the question "What would Ben do?" will become less and less obvious ... and relevant
Under Bernanke, a number of innovative policies were set in place and they have been closed down one by one as they have become less relevant. Under Bernanke, a long run guidepost for inflation was adopted, and a metric to assess the appropriateness of unemployment. Under Bernanke, we seemed to have rules. Maybe there was more the illusion of rules than the substance. But now, the unemployment metric is exposed as the backboneless straw-man that is always has been. And the Fed is specifically going to allow inflation to overshoot its target to rise to as much as 2.5 percent under some conditions. Rules? Fugheddaboudit!
(Read more: Yellen just added pressure on emerging markets)
Although Yellen, in her testimony, declared herself to be a central banker who doesn't want to surprise the public, the Fed now has no guidelines. Zero. Zilch. Zip. Nada. You cannot name the one single thing that drives policy. The Fed has the notion of long-run inflation but has no commitment — ever — to hit that inflation rate. Its unemployment metric is all for show — as if the Fed doesn't consult on policy every time the unemployment rate drops or when inflation moves for that matter.
Whether Yellen agrees with the Bernanke policy or not, the Bernanke policies have brought us to a fork in the road — a fork that is coming up fast. Making matters somewhat worse is the Fed's strange rhetoric of being very unhappy with the level of the unemployment rate and, despite that, engaging in a tapering operation to withdraw stimulus. Make sense to you?
I know that the Fed aimed large-scale asset purchases at boosting the economy and the fed-funds rate at stimulating the unemployment rate lower. But now, the Fed is in the peculiar position of having a policy that is working against its anti-unemployment rhetoric. Promising to not raise the fed-funds rate is not much, especially since the unemployment rate is about to snake under the (first) trip-wire of consultation. In fact, the Fed's forward-guidance conditions already have changed four times. So what credibility is left in them? We are left without guidelines and we are in the Opinion Zone under Yellen: Yellen's O-Zone.
In short, whatever Janet and Ben agreed upon before, it is now all unraveling. What Yellen needs is a good plan "B". She needs to break with the policies of the past. Maybe a plan "Y," for Yellen, would be more appropriate. Policy continuity is a dangerous concept in these times.
— By Robert Brusca
Robert A. Brusca is chief economist of Fact and Opinion Economics, an economic-consulting firm in New York City. Prior to that, he was chief economist at Nikko Securities and a financial economist and Fed watcher at Irving Trust. Brusca started his career on Wall Street working at the Federal Reserve Bank of NY, where he was chief of the international financial-markets division. He was also the very first guest on CNBC.
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