Janet Yellen, the pro tem chair of the U.S. Federal Reserve, is entering the final stretch of her time at the helm of the world’s most powerful and influential central bank. Yellen submitted her resignation Nov. 11, effective once her successor is sworn in next year.
A Historic Stint
Yellen, the first woman to hold the Fed chair post, has had a memorable tenure.
It’s instructive to remember that Yellen assumed the post in 2014, confidence in the dollar had dissipated, the U.S. economic growth rate was sputtering and many questioned whether the Fed was capable of keeping the next financial crisis at bay, or if the central bank itself might be the cause of the next crash.
Sometimes criticized as an interventionist who overemphasized the Fed’s role in stimulating the economy, Yellen has nonetheless overseen a period characterized by tranquil equities markets, decreasing unemployment and muted inflation. Under her watch, U.S. companies have seen their cash hoards and profits grow quicker than their indebtedness, bolstering the average earnings per share along the way. Bloomberg recently attributed the strength of the markets in 2017 to a “Yellen Rally," rather than the so-called “Trump Bump.”
What Yellen may have lacked in innovation — her playbook largely an extension of the accommodative policy of her predecessor, Ben Bernanke —she made up for with a reputation for hard work and the ability to deftly manage the sometimes stark ideological divides between her fellow Fed members.
“She can be tough,” Karen Dynan, a former chief economist with the Treasury Department, told The Washington Post of Yellen, “but she is also warm and compassionate and a good listener.”
The Legacy Question
The lasting effect of Yellen’s time at the Fed is a lingering question. Benzinga spoke with RSM chief economist Joe Brusuelas, and Bankrate chief financial analyst Greg McBride to discuss how her time in the hot seat may have molded fiscal policy for years to come.
What has been Yellen’s biggest success during her tenure? Her biggest misstep?
Brusuelas: The improvement in employment and growth near the end of her tenure, in addition to the financial repression policies she favored and the prodigious build up in equity prices, will likely define the nexus around which her policies are considered successful or not by economic historians and future policymakers.
In my estimation, the major point of controversy around her tenure will be organized around the period of financial repression that she continued, following Bernanke, which has resulted in the damping of yields across the maturity spectrum and pushed risk taking out along the curve.
McBride: The biggest success during Janet Yellen’s tenure has been transitioning from an environment where the Fed was buying bonds and holding interest rates low to an environment where the Fed is actively raising short-term interest rates, has stopped buying bonds and is now actively shrinking the balance sheet.
As far as the biggest misstep: from a regulatory standpoint, the fact that the Federal Reserve wasn’t able to detect the Wells Fargo & Company WFC 0.19% scandal leaves some egg on the face of all regulators, not just the Federal Reserve. But Janet Yellen’s sitting in the big chair — you get the credit when things go well, you get the blame when things don't.
How has Yellen shaped Fed policy in a lasting way?
McBride: What she has done successfully, to date, and hopefully this persists after her departure, is raising interest rates at a gradual pace, and gradually reducing the size of the balance sheet, so as not to tip the economy into recession ... So far so good, but we can’t really close the book on that for some time to come.
It’s like when they take a pitcher out of the game with the bases loaded; if any of those runners score, it gets charged to him. It’s kind of the same thing with regard to the Fed policies. Fed policy acts with a lag. We’ll be several years down the road before we can complete the legacy of both Yellen and her predecessor Ben Bernanke.
Brusuelas: Yellen faced the similar challenge that U.S. central bankers did during the late Depression of the 1930s when many called for a return to the gold standard. On that point it must be said that Yellen, Bernanke and their central banking brethren avoided the mistake of prematurely reverting to orthodox policies [and] throwing the country back into Depression. In my estimation that may have been the greatest achievement of her tenure.
What’s the most important aspect of Fed policy that the incoming Fed chair needs to address?
McBride: Well, we’re changing pilots on final approach here. You’ve got the Fed raising short-term interest rates and taking the unprecedented step of unwinding the balance sheet. The consequences of a misstep are going to grow bigger and bigger as time goes on.
That’s going to be the biggest challenge for Jerome Powell — assuming he’s confirmed as the next Fed chair — is to continue this process of mopping up liquidity without tipping the economy into recession or going so slowly that we ignite either an asset bubble or a spike in inflation.
Benzinga does not provide investment advice. All rights reserved.