From the standpoint of November 2017, Janet Yellen seems so…Obama era. The now outgoing Federal Reserve chairwoman moved from a distinguished academic career to hands-on policy work at the Federal Reserve Board.
She became the Fed’s first female chairperson, and she guided the Fed and the U.S. economy through a delicate process of “policy normalization.” The process is only part done, so it might seem prudent to keep the woman who has successfully gotten us this far in her job.
{mosads}But this is Trump’s America, where a competent but somewhat undistinguished Fed Governor Jerome Powell gets the job because…well, he’s not a Democrat, he worked on Wall Street and maybe just because he is a man.
But I have come to praise Yellen, not to complain about Powell. Janet Yellen’s unforgettable moment at the Fed was her “Minsky Moment” speech in 2008.
Hers was the first public comment by a Fed official that squarely recognized that the financial crisis was not a mild problem that the authorities had under control, but a major, earthshaking disaster.
Yellen advocated strong action to deal with the crisis. Her call was fairly quickly heeded, thanks in part to her urgency and clarity and thanks in part to events that unmistakably proved her right.
Yellen became vice chair of the Board of Governor in 2010, and then chairwoman in 2014. Yellen was a key advocate of an increasingly aggressive set of bond-buying programs aimed at helping the economy fully recover from the Great Recession.
Along with then-Chairman Ben Bernanke, Yellen focused Fed policy on returning the country to full employment. By the time she assumed the chairmanship, the medicine had been deemed effective, and the Fed had announced the tapering down of the program. The initial reaction was a major jump in interest rates in 2013, referred to as the “Taper Tantrum.”
It was in the context of slow recovery and jittery reactions by the financial markets that Yellen assumed the chair in 2014. Like Chairman Bernanke before her, she had some initial bumps in communication. Financial market participants around the world hang on every word a Fed chair says, and they seemed especially skeptical of the first female chair.
But Yellen mastered the art of communication quickly, and markets seemed to get used to her. Her measured, patient, thorough explanations became familiar.
Yellen also was a tireless speaker, constantly going out to talk on a range of topics much broader than earlier chairs had been willing to talk about. She showed a great deal of interest in and concern about the labor market, including the issues of unemployment and poverty.
While this may not have always endeared her to Wall Street, her cautious leadership at the Fed gave little grounds for criticism.
In fact, by delaying the Fed’s first increase in the federal funds rate until December 2015, and the next one until December 2016, Yellen and the Fed gave the economy plenty of room to recover. With inflation puzzlingly low and wages not growing fast, Yellen’s Fed saw no reason to raise interest rates and risk choking off the still very sluggish recovery.
At the same time, Yellen led the demanding process of developing a new strategy for monetary policy. With the central bank sitting on an unprecedentedly giant pile of assets — over $4 trillion dollars — the Fed could not return to its pre-crisis size. Nor could it return to its pre-crisis ways of operating.
Yellen leaves with a rather clear plan for the Fed’s future. The Fed will stop reinvesting the proceeds of maturing bonds in new bonds. This will allow a substantial, but gradual shrinkage in the size of the Fed’s bond portfolio.
That should result in gradually increasing long-term interest rates. These are the rates that affect the credit crucial for major economic activities, such as home mortgages and loans for business investment.
If managed with the care and attention that Yellen and her team gave it, this plan should keep the recovery going for a while longer, without running the risk of substantial overheating of the economy.
In her four-year term as Fed chairwoman, Yellen guided monetary policy serenely through troubled waters. It is troubling that in addition to her, Vice Chair Stanley Fischer, a truly renowned and trusted figure, has also left the Fed.
Adding the departure of the governor responsible for banking supervision, Daniel Tarullo, means there truly is a large hole for the Fed to fill.
President Trump has thus far made two appointments to the Board of Governors. Neither possess anything like the stature or intellectual accomplishments of Janet Yellen or Stanley Fischer. Both are former bankers.
Incoming Chairman Powell, however, has been a Board of Governors member since 2012, so there is hope that he will not change course too much, at least regarding monetary policy. But with President Trump in a position to fill two more seats on the board, the chances for a Fed that is much more on the side of Wall Street seem rather strong.
Yellen learned the lessons of the financial crisis first hand, and she was a forceful advocate for strengthening regulation to avoid another crisis. She will be missed in this regard as well.
Are you sure you have to go, Janet?
Evan Kraft specializes in the economics of transition, monetary policy and banking issues as a professor at American University. He served as director of the research department and adviser to the governor of the Croatian National Bank.