The economy is in good shape — phenomenal shape, really. The labor market is nearing full employment, inflation's mild, and Wall Street bulls are running. So the question on everyone's mind is: Who deserves the credit — President Trump or his predecessor, Barack Obama?
In a Post/ABC News poll released Jan. 21, Obama won, 50 to 38. Surprise, surprise: These percentages correspond closely to Trump's overall approval and disapproval ratings.
The pollsters should have offered a third choice. If personal responsibility for prosperity belongs to anyone, it would be the cerebral economist who on Wednesday presided over the last Federal Reserve meeting of her four-year term as chair: Janet L. Yellen.
Of course, presidents matter. And to the extent they do, Obama deserves more props for the economy than Trump, because the current positive trends all got started under his administration. Trump's tax cuts and regulatory reforms may constitute the magic formula he claims, but, for better or worse, they have not yet taken full effect.
However, Yellen, and the central bank she headed, set the most important prices in the world: U.S. interest rates. Therefore the Fed generally influences the economy more directly than the president and Congress do; this was especially evident during Yellen's 2014-2018 term, when partisan gridlock on Capitol Hill prevented elected officials from launching major policies until the tax cut in December.
In fact, Obama's most consequential economic decision may have been to appoint Yellen in 2014, after reappointing her predecessor, Ben S. Bernanke, in 2010.
Yellen would undoubtedly be the first to credit Bernanke, and the Treasury Departments of both George W. Bush and Obama, with pretty effective crisis management during the 2008-2009 crash — without which we might not even have a recovery to argue over. As a board member of the Fed, Yellen supported Bernanke's use of unconventional recession-fighting policies, including a near-zero interest rate and a multitrillion-dollar bond-buying operation.
Yet after stabilizing the situation, Bernanke left Yellen a task that was in some ways just as difficult, and probably more delicate, than the one he faced: how to nudge the recovery along until it was self-sustaining.
The first woman to chair the Fed faced no shortage of skeptics who called for a relatively early end to the Fed's extraordinary easy-money policies, on the plausible grounds that they created a risk of asset bubbles and other capital-market distortions.
Yellen listened respectfully and stayed focused on the labor market, consulting a range of data beyond the headline unemployment rate, for subtle signs of remaining "slack." It was not until December 2015 that she concluded the market was tight enough to warrant higher interest rates, and the Fed has boosted them only gradually since. Meanwhile, it has set a course to reduce bond holdings by $120 billion during 2018 and by $400 billion in 2019, out of $4.4 trillion in its portfolio.
These measures brought some criticism from monetary "doves," who cautioned against "normalizing" policy too fast.
In hindsight, though, Yellen's approach has been vindicated: Simply put, you can't argue with success. The current unemployment rate of 4.1 percent is a 17-year low; the annual core inflation rate is nearing the Fed's target of 2 percent, with no sign of significantly exceeding it; wages rose 2.6 percent last year.
Trump considered keeping Yellen on for a second term. His decision not to do so could only have been political, not merit-based. She was a Democrat, Obama hired her — and so she had to go.
Fortunately, Trump's choice, Republican Jerome Powell, is one of his best appointments: picked for the Fed's board six years ago as a gesture of bipartisan comity by Obama, Powell is a veteran of both Washington and Wall Street who generally backed Yellen's policies.
Economic forecasters expect 2018 to be another benign year, with the jobless rate falling even further. In the short term, Powell's job seems fairly clear-cut, barring unforeseen crises: follow through on the Fed's predicted interest-rate hikes in 2018, while slowly shrinking the balance sheet.
The question is what might happen when growth cools, which is bound to happen sooner or later, and quite possibly before the 2020 election.
It would not be in Trump's nature to accept responsibility for a souring economy, even if it reflected a crisis of his own making — a trade war, say, or a military clash with North Korea.
More likely, he would look around for someone to blame, and the Fed chair would be an all-too-convenient scapegoat.
If and when that happens, we'll find out if Jerome Powell is made of the same stern stuff as Janet Yellen. The effectiveness of the central bank, like that of the federal judiciary or the FBI, depends on its political independence.
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