Yellen defends legacy amid uncertainty

Federal Reserve Chair Janet Yellen ( right) defended the central bank’s use of unconventional and often unpopular monetary policy tools after the Great Recession, highlighting some of her achievements at the helm as President Donald Trump weighs her reappointment.

“The US economy is much stronger today than it would have been without the unconventional monetary policy tools deployed by the Federal Reserve in response to the Great Recession,” Yellen said in Washington on Friday.

Yellen, on a short list of potential Fed chairs being reviewed by Trump, made the case for preserving policy makers’ ability to confront the next recession with more bond purchases, a strategy known as quantitative easing aimed at lowering borrowing rates.

“While I believe that influencing shortterm interest rates should continue to be our primary monetary policy lever in normal times, our unconventional policy tools will likely be needed again should some future economic downturn drive short-term interest rates back to their effective lower bound,” Yellen said.

Yellen and her predecessor Ben Bernanke were heavily criticised by Republicans in Congress for bloating the Fed’s balance sheet with $3.5 trillion in Treasuries and mortgagebacked securities. They often claimed the effort only served to encourage government deficit spending and risk-taking by investors.

The Fed began shrinking that balance sheet this month.

“One should recognise that the recovery could have been much slower in the absence of our unconventional tools,” Yellen said. She said that evidence “strongly suggests” that bond purchases helped spur economic activity and lower unemployment.

If the Fed does consider bond purchases again, it’s unclear whether Yellen will have any role. Her four-year term as chair is set to expire in February. BLOOMBERG