Yellen defends QE as Trump ponders next Fed chair

The US Federal Reserve chairwoman, Janet Yellen, 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,” Ms Yellen said in Washington on Friday.

Ms Yellen, on a shortlist of potential Fed chairs being reviewed by Mr Trump, made the case for preserving policymakers’ ability to confront the next recession with more bond purchases, a strategy known as quantitative easing (QE) aimed at lowering borrowing rates. “While I believe that influencing short-term 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,” Ms Yellen said.

Ms Yellen and her predecessor Ben Bernanke were heavily criticised by Republicans in Congress for bloating the Fed’s balance sheet with US$3.5 trillion in treasuries and mortgage-backed 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,” Ms 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 Ms Yellen will have any role. Her four-year term as chair is set to expire in February.

Mr Trump said earlier on Friday he’s considering Ms Yellen along with Fed Governor Jerome Powell, Stanford University professor John Taylor and “a couple of others”.

“Most people are saying it’s down to two – Mr Taylor and Mr Powell,” Mr Trump said in an interview. “I also met with Janet Yellen, who I like a lot, I really like her a lot,” he said.

Mr Taylor has questioned bond-buying. If rates were to return to zero, he has suggested it would be sufficient to rely on public assurances by the Fed to hold rock-bottom rates for an extended period of time – a communications strategy known as forward guidance – to help bring long-term borrowing costs down.

Amid the drama surrounding the Fed chair selection, officials are still struggling to understand contradictory economic data and what that should mean for monetary policy. Ms Yellen has called this a mystery but has signalled her desire to continue raising rates gradually.

Ms Yellen and her predecessor Ben Bernanke were criticised for bloating the Fed’s balance sheet