Yellen put economy on firmer ground, steered Fed away from crisis era

 

WASHINGTON: Federal Reserve Chair Janet Yellen will depart as head of the world’s most powerful central bank after four years, during which she has put the U.S. economy on a much firmer footing and steered monetary policy away from the crisis era.

Yellen, who in 2014 became the first woman to lead the Fed in its 100-year history, was passed over on Thursday for a second term by President Donald Trump, in a break with past practice.

When the New York-born economist, 71, hands over the reins to her successor, Fed Governor Jerome Powell, early next year, she will do so as the first leader of a major central bank since the 2007-2009 financial crisis to have put interest rates on what, so far, has been a sustainable upward path.

Yellen presided over the first rate rise in almost a decade, a move that was followed by three more hikes during her tenure. The Fed is expected to raise rates again in December.

Nominated by then-President Barack Obama to succeed Ben Bernanke, Yellen also spearheaded the end of the Fed’s bond-buying program initiated to stimulate the economy after the crisis and the start of the gradual reduction of its $4.5 trillion balance sheet this year.

“I don’t know how you could fault it,” said Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics who worked at the Fed for two decades.

“She is a very polished, careful, respected leader. Markets have been as smooth as possible and we’ve never seen such stable and consistent jobs growth for so long.”

Investors comfortably digested the announcement this year that the Fed would cut its holdings of Treasuries and mortgage-backed securities, unlike the 2013 “taper tantrum” that followed Bernanke’s hint that the bond-buying program might be curbed.

On Yellen’s watch, unemployment in the United States has fallen to 4.2 percent from 6.7 percent, and the economy has been growing for more than eight years, albeit at a much slower pace than in previous recoveries from a recession.

She won praise for spotting risks in the housing market in 2007, before many of her colleagues, according to minutes from Fed policy meetings at the time, and for keeping rates at historically low levels until the job market had healed.

And at a time when the world’s central bankers are increasingly viewed as out-of-touch technocrats, Yellen also highlighted the risks of rising inequality, even at the cost of stirring criticism from Republicans in Congress for a perceived overreach.

“I think it is appropriate to ask whether this trend is compatible with values rooted in our nation’s history,” Yellen said in a speech on economic opportunity in 2014.

It hasn’t all gone to plan. Yellen and other Fed policymakers had forecast a far more rapid rise in rates, and she and others have been faulted for being unable to boost inflation, which has repeatedly undershot the central bank’s 2 percent target despite a tight job market.

No grey suit

Known for her fierce intellect, vigorous preparation and attention to detail, Yellen has held various positions at the Fed, White House and in academia.

She was the only woman among 21 PhDs in economics granted by Yale University in 1971 and brought an academic’s desire to educate and inform into her career as a central banker.

“When she answers a question, she really wants you to understand,” said Andrew Rose, a longtime friend and fellow professor at the University of California, Berkeley, where Yellen taught for a number of years.

He recalled that “her view was that she’d rather have her students understand two-thirds of the material completely than all of it superficially.”

Those characteristics stood Yellen in good stead at the Fed at a time when many of the assumptions of central bank policymaking - on inflation, productivity, investment and wages - had come into question.

Chicago Fed President Charles Evans, who has sat on the rate-setting committee for the last 10 years, described Yellen’s “winning” style as someone who “listens to everybody, let’s people talk things out, provides the leadership that is needed at the right time but making sure everyone has a chance to contribute.”

It may, however, have been Yellen’s forthrightness that ended any chance for a second term as Fed chief. Despite the Trump administration’s push for financial deregulation, she has steadfastly maintained that most of the rules put in place to prevent another financial crisis should remain.

As Trump intensified his focus on the nomination in August, Yellen sent a clear message to Congress and the White House.

“Memories ... may be fading — memories of just how costly the financial crisis was and why certain steps were taken,” Yellen said in a speech at a global central banking conference. “Any adjustments to the regulatory framework should be modest.”

Yellen is entitled to remain as a Fed governor until 2024, though previous central bank chiefs have traditionally not stayed on the board once a successor was in place.