Why the Fed’s Yellen is her own best successor
U.S. President Donald Trump has reportedly begun the process of deciding who will lead the U.S. Federal Reserve after Janet Yellen’s term ends early next year. If he wants the best outcome for the economy, he can’t do better than Janet Yellen.
Let’s consider Yellen’s track record. She has been chair of the Board of Governors and the policy-making Federal Open Market Committee since February 2014, which means she leads the central bank’s efforts to promote maximum employment and price stability. During this period, net job creation of more than 200,000 jobs a month has brought the unemployment rate down from 6.6 per cent to 4.3 per cent, more than a percentage point lower than what the Fed saw as the sustainable long-run rate in March 2014. Meanwhile, core inflation has been consistently well below the Fed’s two per cent target: As of April, it stood at just 1.5 per cent.
In short, Yellen’s policies have contributed to a surprisingly strong labour market recovery, yet also been sufficiently cautious to keep inflation below target. Some would see this as an all-around success, though the Fed’s caution does have a downside: Markets appear to believe that the central bank is unwilling or unable to hit its inflation target with consistency. Prices of Treasury bonds suggest that investors expect the Fed’s preferred measure of inflation to remain well under two per cent five to 10 years from now. If it persists, this loss of credibility means that the Fed will have less ammunition to fight the next recession. So could any of the other potential appointees do better? A Bloomberg poll suggests that they include former Goldman Sachs president (and current Trump administration official) Gary Cohn, former Fed governor Kevin Warsh, Prof. John Taylor of Stanford and Prof. Glenn Hubbard of Columbia. I know little about Cohn’s monetary policy views, but I worry that his past employment experience would contaminate the public’s perception of Fed decisions made under his leadership. On that basis alone, I would exclude him from consideration.
Warsh, Taylor, and Hubbard all reportedly see Yellen’s Fed as having been too dovish, suggesting that they would have done less to support the economic recovery. This approach would have led to higher unemployment and lower inflation — an inferior fulfilment of the Fed’s dual mandate that marks them as worse candidates than Yellen. It’s also important to remember that Taylor and Warsh argued publicly against additional monetary stimulus in 2010, when the unemployment rate was almost 10 per cent and the inflation rate had fallen nearly to one per cent. Their concerns about excessive inflation proved to be completely unjustified. Yellen, by contrast, supported stimulus.
Yellen has a proven track record that’s hard to beat. The evidence suggests that the other candidates wouldn’t do as well. The president should reappoint her to the position of Fed chair.
Kocherlakota is a professor of economics at the University of Rochester and was president of the Federal Reserve Bank of Minneapolis from 2009 to 2015.
Bloomberg