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All Over But the Yellen: A Look Back at the Outgoing Fed Chair’s Tenure

December 19, 2017
by Glen Martin

The tenure of Federal Reserve Board chairwoman Janet Yellen is drawing to a close. In February, she’ll leave her post—arguably the second-most powerful position in Washington after the presidency—and will be replaced by Trump appointee Jerome Powell, a member of the Fed Board of Governors. 

Most Fed chairs serve two four-year terms, but Yellen, likely hobbled by Trump’s aversion for anyone or anything associated with the Obama administration, has served only one—a fraction of her full term of 14 years. Still, despite her truncated reign, an evaluation is appropriate.

“In general, you want to wait a year-and-a-half or two years after a Fed chair has left to judge relative success,” says Andrew Rose, a professor of economic analysis and policy at the Haas School of Business. “That’s because any significant shift in monetary policy, such as a change in interest rates, takes from one to two years to take full effect.”

Still, when considered from a statistical point of view, Yellen appears to have been successful, says Rose.

“When you take actual inflation and compare its deviation from the standard two percent target, and when you do the same with unemployment and its four to five percent goal, she did really well,” Rose says.

“Now, there were no major financial crises during her term, and if something happens in the next six months, part of that will be on her. Also, the Fed chair is not a dictator. It’s a complex situation. There are other people, other agencies involved in monetary policy. But if you look at where we are now, she has been one of the most successful, if not the most successful, chairs in the Fed’s history.”

“It’s very hard to say that she hasn’t been the most effective Fed chair ever.”

Ross Levine, the Willis H. Booth chair in banking and finance at Haas, has a view of Yellen that’s at least as sanguine.

“On monetary policy, the Fed has two main objectives,” says Levine, “and that’s maintaining full employment and stable prices.”

Full employment doesn’t mean complete employment because many people may be temporarily out of work while looking for new or better jobs; indeed, Levine says, some unemployment is inevitable in a dynamic and healthy economy.

“The objective is to be in a ‘natural’ rate of employment given the structure of the economy and independent of booms and busts,” says Levine. “Most economists agree that corresponds to an unemployment figure of about five percent.”

In terms of inflation, economists look for a Goldilocks scenario—not too much and not too little. If too much money is chasing scant goods, currency is devalued, prices spiral, and your paycheck can’t cover expenses. If prices fall too precipitously you get deflation, which can reduce employment due to slackening demand for products and services, discourage banks from lending, sink the stock market, and lead to breadlines and Hoovervilles.

Given all that, says Levine, “We had pretty much full employment, and inflation was right around two percent during Yellen’s term. That makes it very hard to say that she hasn’t been the most effective Fed chair ever. Now, Ben Bernanke [Yellen’s predecessor] was also spectacular because he was chair when the [2008] financial crisis hit, he thought outside the box, and he took unusual and ultimately successful actions. So, it can be hard to rank Fed chairs. But considering the challenges she faced and the objectives that were handed to her, she has been exceptionally successful by any measure.”

“Trump gets to fill board vacancies, and he has shown he has terrible taste in the people he appoints. That is not a trivial issue going forward.”

But with Yellen leaving, the focus is now on Powell and the state of the Federal Reserve Board in the era of Trump. Rose characterizes Powell as a reasonable person, but notes he’s not an economist; he was trained as a lawyer and investment banker.

“Whether that becomes an issue remains to be seen,” Rose says. “But another thing to consider is the high number of vacancies on the board. Until recently, the quality of the board was at a long-time high. The members were immensely qualified. Trump now gets to fill those vacancies, and he has shown he has terrible taste in the people he appoints. That is not a trivial issue going forward. Also, you really need a persuasive and successful chair to preserve the independence of the Fed and to assure that financial stability is taken seriously. We really don’t know how Powell will do in that regard.”

Levine says Powell indicated he would follow the same general monetary policy as Yellen—a signal likely to engender relief among economists. But, Levine adds, Powell may diverge from Yellen in regulatory policy.

“We’ll only see with time, but given the nature of his speeches, I suspect Powell may be sympathetic to the urgings of the U.S. Treasury Department to be less stringent in constraining risk among the major financial institutions,” Levine says.

Not all deregulation is the same, says Levine. Indeed, some financial regulations could benefit from a do-over; they could be altered in a manner that would improve rather than simply defang them.

“But right now, some of the ideas coming out of Treasury could be quite destabilizing to the economy in the long run,” Levine said. “It’s easy to eliminate restrictions, but incredibly difficult to disincentivize excessive risk-taking by major institutions. And we really have to do that first—disincentivize risk—before we start aggressively eliminating restrictions. Otherwise, the country ends up creating a too-big-to-fail environment. That’s what happened in 2008. Big institutions like Goldman Sachs and Citibank had made extremely risky investments, figuring the government would bail them out. So, a Fed that reduces restrictions without correcting incentive problems could be very problematic. That could turn out to be the consequential difference between Yellen and Powell.”

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