It’s the reappointment of Federal Reserve Chair Janet L. Yellen for another term.
Yellen’s four-year term expires in February 2018, and she’s clearly in the running for reappointment. There are others on the list, but none have Yellen’s experience, her track record or her commitment to full employment and growth.
Moreover, we’re deep into an economic expansion with low unemployment, strong job growth, stable markets and no obvious signs of bubbles. If ever there was a steady-as-she-goes/don’t-change-horses-in-the-middle-of-a-stream moment, this is it.
Those adages are particularly germane given that the Fed is coming out of a period marked by two unprecedented actions, both of which were intended to help offset the massive demand contraction known as the Great Recession.
First, from 2008 (before Yellen was chair) until 2015, the Fed held the benchmark, short-term interest rate at zero. Second, in an effort to put downward pressure on longer-term interest rates, the Fed spent trillions on longer-term assets (Treasury bills and mortgage-backed securities) in its “quantitative easing” plan.
It has since been engaged in a “normalization” campaign, slowly raising rates and winding back QE by very gradually reducing their debt holdings. Anyone who follows the Fed knows that these moves are controversial and intensely watched by markets. Given the lack of inflationary pressures, I myself have cautioned against rate increases, while others have critiqued the Fed from the other direction, arguing for it to quickly normalize rates and get out the bond market.
But I am not going to litigate that argument. I want to point out that Yellen is deeply embedded in the process of carefully and successfully managing this ongoing campaign. By “successfully,” I mean that at this delicate moment in the history of monetary policy, she’s providing markets here and abroad with the information they need to understand the Fed’s actions. In doing so, she thoroughly eschews former Fed chair Alan Greenspan’s intentional opacity (“If I seem unduly clear to you, you must have misunderstood what I said”), and builds further on her predecessor Ben Bernanke’s principle of “forward guidance.”
This is why, I suspect, surveys of economists, investors and industry leaders favor reappointment by wide margins. They’ve learned to speak “Yellen” and would rather not learn a new language at this point in the campaign.
Next, more so than some of the other front-runners for the job, Yellen is pro-growth, which should appeal to Trump, who has himself made this observation about her. Like normalization, this issue of balancing growth and inflation — the Fed’s dual mandate — stands at a sensitive moment. The model the Fed uses as a guidepost in the trade off between inflation and unemployment is broken. Historically, falling unemployment had been correlated with faster inflation, but lately, as the jobless rate hits new lows, inflation is, if anything, growing more slowly.
While some others on the Fed, as well as some who would replace Yellen, discount this breakdown in the model and seem hellbent on rate increases regardless of what the data say, Yellen has been working hard to figure out this important change. Just last week, she questioned whether perhaps there was more slack in the labor market than she and her colleagues thought (I believe there is) and whether they need to rethink “the fundamental forces driving inflation.” For someone of her experience and stature to be asking these questions reveals a flexibility of thinking that is as rare as it is vital in highly placed economists.
I can foresee two complaints against Yellen’s reappointment, neither of which are valid and which Trump should ignore.
First, those “hard-money” types who flat-out oppose monetary stimulus in response to recessions will criticize her support of the Fed’s aggressive response to the last recession. In fact, the balance of the evidence, which I review here, shows that their actions “significantly boosted jobs and growth in the Great Recession and the recovery that followed, without generating market distortions.”
And, for the record, these actions, taken under Bernanke’s leadership, were widely agreed upon by virtually all the members of the Fed board.
Second, one area where Yellen has directly contradicted Trump is regarding the Fed’s role in regulating the banking system. She has underscored the importance of measures, such as the Dodd-Frank financial reform, intended to avoid bubbles and financial busts, while Trump has called for repealing them.
But Trump should consider the growth implications of his position. If you take down the guardrails, the next time a bubble inflates, you’re inviting one of two outcomes. Either you get a recession when the bubble bursts, or, to offset the impact of the bubble, the Fed will need to jack up rates, slamming on the growth brakes. In fact, Yellen has argued that the purpose of ample oversight is to avoid punishing millions of average households with slower growth and higher unemployment because the under-regulated banking sector again systematically underprices risk.
Finally, by reappointing a woman — and Yellen is the only woman under consideration for the job — Trump sends an important message about gender balance in a highly male-dominated sector.
Like most economists, I don’t believe in free lunches. But for all these reasons, I’m convinced that reappointing Yellen is all upside for the president and, even more important, for the rest of us.