You could argue that Janet Yellen’s tenure as Chair of the US Federal Reserve (the Fed) was the easy bit. Ben Bernanke had to operate in the eye of the financial crisis storm while Jerome Powell inherits the long and potentially pernicious tail of quantitative easing.
The data suggests that there was already momentum in the economic recovery when Yellen took over. Her task was to not make a mess of it. As she departs, growth is solid and unemployment low; but it has taken us a long time to get here.
Inflation, meanwhile, has disappointed. The Fed’s inflation target remains elusive, and this should perhaps count against her. Ultimately the Fed gets to set the price level, so if it really wanted to, it could have done more to conjure inflation by keeping policy even easier. The Fed has been extremely quick to point to ‘one off’, ‘temporary’ factors to explain the inflation undershoot. However, these factors have been rather too frequent to all be plausibly described as ‘one off’. Furthermore, all seem to point in the same direction. It may simply be that the Fed has underestimated the degree of inflationary pressure in the economy and so has tightened too quickly.
But inflation is not the sole measure of success. Setting policy involves trade-offs, and there are risks attached to extremely accommodative monetary policy. Given the risks to financial stability and asset price bubbles, it is not unreasonable to think Yellen took a sensible middle course in accepting only a gradual return of inflation to target. This debate will not be put to bed any time soon, so it’s perhaps too early to judge this aspect of Yellen’s record.
Yellen took office in febrile times: the Taper Tantrum had sent US Treasuries surging and emerging markets diving the previous year, and many assumed that such volatility would be repeated when the Fed started to tighten further. Yet she set about her task with a steady, methodical sense of purpose that reassured investors.
History will be the judge
That first, hotly anticipated rate rise came and went without event. So too did the start of the process of unwinding quantitative easing (QE). The Fed passed these key tests with aplomb as other debates swirled. Whatever challenges incoming Fed chair Jerome Powell faces in handling QE’s run off, these will surely be easier than having had to kick-start the process.
History will probably look back on a single Bernanke/Yellen era. She played a vital role in the Bernanke Fed, and her Fed leadership was largely a continuation of the framework and policy stance adopted by Bernanke . Moreover, the economy largely continued to evolve along the same path: a gradual fall in unemployment, unspectacular growth, and inflation below target.
Yellen set about her task with a steady, methodical sense of purpose that reassured investors.
This should continue under Jerome Powell. Any changes will be an evolution, not a revolution. He is in line with his predecessor’s thinking on the broad direction of policy. The biggest issue Powell will face this year is how to deal with tax cuts that are essentially easing while the Fed is tightening. This raises the prospect that the Fed could have to hike rates more aggressively than planned.
Yellen has plenty of achievements to be proud of. In an age of pseudo celebrity central bankers, her quiet leadership provided stability to the global economy. But legacies are rarely defined on the last day of office - Alan Greenspan’s reputation was sky-high when he departed the Fed in 2006; it was subsequently trashed in the wake of the 2008 financial crisis. Yellen is unlikely to suffer the same fate as Greenspan - but the history writers should wait a while yet.
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