Janet Yellen will be remembered for her assertive voice in the global economy
WHEN JANET Yellen leaves the Federal Reserve this weekend after four years as chairperson, her legacy will include having shattered a social barrier. She is the first woman to have led the world’s most powerful central bank, a position that carries enormous sway over the global economy.
Yellen will be remembered, too, for her achievements in deftly guiding the Fed’s role in the US economy’s slow recovery from a crushing financial crisis and recession. She picked up where her predecessor Ben Bernanke had left off in nurturing the nation’s recuperation from a crisis that nearly toppled the financial system.
As Jerome Powell prepares to succeed Yellen, here are some areas in which her era at the Fed helm will be remembered:
Yellen served not just the past four years as Fed chair, but for 2½ years in the 1990s as a Fed board member, then six years as president of the Fed’s San Francisco regional bank and then for four years as the Fed’s vice-chairperson during Bernanke’s second four-year term. In all those roles, Yellen proved herself an able economic forecaster. She often detected perils before others saw reason for alarm, and she became a forceful advocate, especially during the Great Recession, for an aggressive response to economic weakness.
Inflation As the recession deepened and millions more Americans lost jobs, Yellen was an assertive voice backing up Bernanke in the path-breaking move by the Fed to buy enormous quantities of Treasury and mortgage bonds to try to drive down long-term borrowing rates to support the economy. Critics warned that the bond purchases, which eventually swelled the Fed’s balance sheet fivefold to $4.5 trillion (R53.5trln), could trigger high inflation. So far, inflation has not only remained low, but for six years has remained below even the Fed’s 2 percent target rate. The Yellen-led Fed continued to support the bond purchases in the face of scepticism. Later, it rebuffed pressure to start selling off its record-high bond holdings.
Finally, in October, after the Fed felt it had achieved its goal of maximum employment, it began gradually paring its bond portfolio. Yellen extended an innovation of the Bernanke Fed by holding quarterly news conferences after four of the eight policy meetings each year. At these roughly hourlong sessions, Yellen usually managed to shed some light on the Fed’s thinking about its rate policy, while cautioning that any future policy changes would hinge on the latest economic data. By all accounts, she avoided any major communication stumbles by telegraphing the Fed’s moves in advance to avoid catching investors off guard.
Her success in this area contrasted with a rare but memorable stumble by Bernanke: In 2013, Bernanke triggered what came to be called the “taper tantrum” when he first raised the possibility that the Fed could start gradually tapering its bond purchases in the months to follow, remarks that sent bond prices plunging.
Yellen, more than her predecessors, stressed the overarching importance of increasing job growth to the greatest level possible. The other is to manage interest rates to promote stable prices, which the Fed has defined as inflation averaging 2 percent annually.
Yellen’s predecessors worried most about triggering debilitating bouts of inflation of the kind the US suffered in the 1970s. That meant favouring higher rates to limit borrowing and spending. Yellen was different. She believed the economy had entered an era in which the gravest threat wasn’t inflation but a prolonged period of weak job growth.
She argued the Fed could leave its key policy rate at a record low near zero for far longer than thought prudent.
So far, Yellen has been proved right. The unemployment rate has reached a 17-year low of 4.1 percent, with stilllow inflation.