Janet Yellen, the chair of the Federal Reserve’s Board of Governors, travels Tuesday morning to Capitol Hill. She’ll deliver her first Humphrey-Hawkins testimony (formally known as the Semiannual Monetary Policy Report) and will testify before the House Financial Services Committee. Yellen is well aware of the challenges she faces in leading the Fed as it exits from unconventional monetary policies that it put in place to stem the global financial crisis and to revive the economy.
Yellen also faces an acute political challenge. According to Gallup, just 40 percent of the public approved of the job done by outgoing chair, Ben Bernanke. In contrast, Alan Greenspan enjoyed the support of 65 percent when he stepped down as chair in 2006. The Fed’s public standing matters because it helps to shape the political environment in which the Fed makes monetary policy. As former Fed vice chair Donald Kohn noted recently at Brookings, “The decision to turn toward tightening is always difficult and subject to second-guessing in the political sphere.” The greater the public’s confidence in the Fed, the greater the Fed’s autonomy and its ability to make tough policy choices. When public confidence is low, the Fed’s political resolve to make hard choices might be questioned. In turn, uncertainty about future Fed policy undermines the effectiveness of monetary policy.
Snapshots of public approval can be misleading. We can’t tell from the Greenspan and Bernanke final marks, for example, what forces shape public confidence in the Fed. And those marks change over time – even after a chair’s time on Constitution Avenue has past. For a broader portrait of public confidence in the Fed, the figure below reports every poll available in the Roper Center’s Public Opinion Archives that touches on public approval of, confidence in, or support for the Federal Reserve, its chair, or its monetary policy choices such as interest rate decisions. (For the record, I dropped the question that asked respondents in 2000 whether Greenspan was a “genius” or a “power hungry man.”) Granted, the wide range of questions might tap different dimensions of the public’s views about the Fed, and we might prefer a more sophisticated aggregation akin to Stimson’s mood measure. For ease of interpretation, however, I report raw marginals here.
Three trends stand out in the data.
First, pollsters periodically ignore the Fed. After a burst of attention during Paul Volcker’s controversial rate increases to squelch inflation in the late 1970s and early 1980s, pollsters focused elsewhere until the middle of the Greenspan era. The sparse data midstream limits our ability to generalize about the forces shaping opinion over the longer term.
Second, Bernanke fared much better than Volcker. Although reporters like to emphasize how tough the public was on Bernanke relative to the “Maestro” Greenspan, Bernanke’s 40 percent approval looks better when we take the longer view of the Fed’s public standing.
Third, as shown in the figure below, the state of the economy naturally helps to shape approval of the Fed. Regressing the Fed’s average annual approval rating against the annual unemployment rate over the past 35 years makes clear that tougher economic times lower confidence in the Fed. For every 3 percent drop in unemployment, approval rises a point; a one-point drop in inflation also nudges approval up a point. Rookie Fed chairs face marginally more skeptical publics, perhaps reflecting markets’ concern when a new chair takes office. Witness investor jitters during Yellen’s first week on the beat, even though the change in Fed leaders had relatively little to do with the slowdown in the economy.
Finally, we can assess whether particular Fed chairs over or underperform in the public’s eye relative to the model’s predicted approval. Bernanke’s faced tougher sledding than we would expect in 2010 and 2011. That might reflect the harsh, conservative criticism of Bernanke early in his second term (including an unprecedented letter from GOP leaders warning the Fed to change its tacks). In 2012 and 2013, Bernanke fared better than expected. Perhaps the “all-out campaign” by the Fed to win back public support worked.
Yellen’s political challenges start Tuesday morning when she faces a Republican majority eager for the Fed to speed up its exit and a Democratic minority urging caution. Still, she might throw a few surprises if lawmakers and markets expect a pure monetary dove. When she delivers the Humphrey-Hawkins report, she speaks for the full Federal Open Market Committee. Given the FOMC’s diversity of views, Yellen is unlikely to try to lead the institution from the dovish fringe. Even with a strong performance Tuesday morning, Yellen’s main political challenge lies ahead as she tries to steer the FOMC to the exit. The public will judge Yellen and the Fed by the results, ultimately shaping the Fed’s independence.