Four years ago, I made the case why Janet Yellen would make an excellent chair of the Federal Reserve. As testimony to the power of our mighty blog, President Obama followed our advice and nominated her for a four-year term. So I thought I’d call attention now to a few of the reasons why President Trump should ask Yellen to serve a second term.
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The economy and financial markets have performed very well while Yellen has been at the helm. To be sure, the Federal Reserve is just one factor in that, but a factor nonetheless. Unemployment has reached a 16-year low and stock prices made all-time highs. Monetary policy and financial markets are returning to normal and banks’ balance sheets are healthy. Markets have confidence in U.S. monetary policy, and so do I.
I’ll acknowledge that I might have done some things differently. I’ve favored a slower trajectory for hiking interest rates this year and next than the Fed has been following. But I have enough confidence in Yellen’s judgment to be convinced that if I’m right in that assessment, the Fed will slow the pace of hikes. And if instead the Fed keeps charging up, it’s probably because I was wrong and Yellen was right.
One reason I say that is because I am extremely impressed by the collective expertise of the staff of economists working for both the Federal Reserve Board in Washington DC as well as the many regional banks. The staff is very well informed, and the Federal Reserve is unique among all the institutions with which I am familiar in enabling the many individuals to work as a team to analyze everything that is going on. The Fed is not a top-down institution, where the boss gives the orders and everyone reluctantly follows. Instead, it’s a place where the key insights and information of different individuals can make their way up to the top. This is thanks in part to the style of leadership cultivated by Chair Bernanke and strengthened further by Chair Yellen. Both are solid, independent thinkers, capable of decisive action, but also very good listeners. These are the core attributes we need in a Federal Reserve chair.
If President Trump were to renominate as Fed Chair an individual initially nominated by his predecessor, he would not be alone. Ronald Reagan asked Carter’s nominee Paul Volcker to serve a second term. When Volcker’s second term was up, Reagan chose Alan Greenspan, who ended up being renominated by Bill Clinton and both Presidents Bush. And President Obama asked George W. Bush’s nominee Ben Bernanke to serve a second term.
There’s a reason for that. Every president knows that monetary policy is very important but that it involves a lot of details the president himself really doesn’t understand. The wrong nominee could jolt the markets, and no president, whatever their ideology, wants to see that.
Renominating Yellen would be a vote for stability and a vote for competence. The present administration would unquestionably benefit from making that kind of move.
Every president knows that monetary policy is very important but that it involves a lot of details the president himself really doesn’t understand.
Hmmm…every president knows that??? For every rule there’s an exception, and we all know that Trump is an “exceptional” president. I just hope we don’t end up with Gary Cohn…or worse yet, Stephen Moore or some goldbug poster at zerohedge.
We have actual proof President Carter was “exceptional” appointing G.William Miller.
Yep. No argument there. Miller was a dud. But at least Carter showed the capacity to learn from his mistakes and he quickly replaced Miller with Volcker.
The guy who knows more about ISIS than the generals likely knows more about monetary policy than any economist or board of economists. (He is, after all, the guy who also proclaimed his love of debt and who once floated the idea of redeeming Treasuries at less than par).
The Fed will soon begin to unwind its $4.5 trillion balance sheet, most likely by not replacing bonds as they mature. Some people believe, it will cause corrections in financial markets or burst some bubbles.
“I am extremely impressed by the collective expertise of the staff of economists working for both the Federal Reserve Board in Washington DC as well as the many regional banks.” How many of the hundreds of economists were able to foresee the Great Recession – zero. My guess is that because of institutional dynamics and self-preservation they cannot publicly predict a negative future occurrence no matter how strong the signs. While much of their work is very useful, I think they will always have serious limitations in some areas.
The Fed foresaw a potential recession, which began in December 2007, by lowering the Discount Rate in August 2007 and the Fed Funds Rate in September 2007, i.e. beginning an easing cycle months before the stock market peaked, and in spite of the inflationary oil shock.
Economists are limited by fiscal policy and other economic policies controlled by lawyer/politicians.
I’m sorry but I have to disagree. While it is quite possible we could do worse than Yellen, we could also do much better. Yellen is no inflation dove. In fact, she was one of the most vehement hawks calling for hikes in the late 1990s, the last time in recent decades that wage earners got a real wage increase. This incidentally was the one time Greenspan was right (and Yellen was decidedly wrong, proving her hawkish inclinations).
It takes an extremely incompetent Fed to undershoot both employment and inflation targets for almost a decade, something that seemed impossible to do simultaneously previously. Yellen has invariably been overly optimistic about recovery, threatening to raise rates almost every meeting since the start of the recession. Her timid policies have increased the misery of tens of millions of American families. She has threatened to put her boot on the neck of wage earners at the first sign they have of real wage gains.
Instead of promising stimulus and inflation of 4%, she has managed to undershoot even her mediocre target of 2% by treating 2% as a ceiling and not an average, raising rates when approaching the target from below.
The current Fed in entirely captured by bankers. No only did they fail in their FOMC policies, they also completely failed in their regulatory duties leading up to the Great Recession, giving their blessing to the “innovative” shenanigans of the big banks. This was a classic example of regulatory capture.
The idea of an “independent” Fed is a joke. We have a Fed that is too beholding to Wall Street and bankers. To have real independence, the Fed should be comprised of one third bankers, one third labor representatives and one third consumer representatives. Only then can we safely say that all views are fairly represented.
However, it goes without saying that given a choice between Yellen and literally anyone else that Trump might dredge up, I would have to go with Yellen.
The Fed can only do so much. It deserves a lot of credit (pun intended). The blame belongs to the anti-growth policies, with the pro-growth policies, out of Washington, resulting in a very expensive and weak “recovery.”
Jim,
I completely agree with your post, and I was the first person to publicly call for her to be appointed way back in 2009 when there was this brief moment when it looked like Bernanke might now want to go for a second term. Your point about presidents of one party initially reappointing Fed chairs appointed by somebody of the other party is excellent, and few have noted that if Trump insists on appointing some nominal Republican, even someone moderately respectable, it would politicize a body that has been not all that politicized, even if it has always been at least somewhat political.
You express concern about them pushing up rates too fast, but then they have not pushed them up as fast as they said they would. While I agree with you that the research teams are excellent, it is also the case that there is a tendency for a certain groupthink to occur at the Fed, which in this case has posed a natural rate of unemployment that we are now below, with the usual squawking that we must raise interest rates quite a bit, even though we have yet to noticeably breach the official inflation rate target. My speculation is that Yellen and other really smart insiders like Bullard are trying to get interest rates up a bit while the economy is doing well so that they can lower them again in the future the next time we have a recession, but doing so as carefully as possible so as not to slow things down. I do not know for sure if that is what they are doing, but so far it looks like they have been pulling it off.
joseph,
I think you are misinformed. Yellen helped Greespan out back in the mid-90s when he went against the view that the Fed should start raising interest rates as the UR went below the then supposed NAIRU/natural rate level. She convinced him that a 2% inflation target was better than a zero % one, drawing to some extent on work by her husband, George Akerlof and others at Brookings then. She has the best forecast record of pretty much anybody at the Fed, being the first one in a high position to warn about the housing bubble starting as far back as 2005. I think you are way off in blaming her for bad policies coming out of the Fed.
More broadly, I think a lot of people have underwritten her, with a lot of this being sexism and even lookism and even heightism. I have seen photos of finance ministers ogling glamouros and tall Lagarde while much shorter Yellen sits primly by herself. Lagarde herself knows better, and I saw at Jackson Hole people like Draghi hanging on Yellen’s every word, with Blinder declaring that she has shown “backbone.” She certainly has. If she goes down, it looks like she will do so standing for principle.
BTW, Cohn now looks to be in deep doo doo after his criticism of Trump’s remarks on Charlottesville. This is going to be a very uncertain business.
Trump has enough other worries.
She will be reappointed, and I suppose she will agree.
Relax, james.
Keep rates low and don’t shrink the balance sheet!
OH WHAT A BRILLIANT ECONOMIST!!!
Could hurricane cause oil and gasoline glut in Midwest. How will it affect access to distribution networks?