Let’s hear a round of applause for Janet Yellen.
The soon to be ex-chair of the Federal Reserve took the helm when the US was still picking up the pieces from the global financial crisis. She faced weak employment and an economy that was at the time receiving trillions of dollars in injections to stay afloat. Her predecessor, Ben Bernanke, may have had to make hard choices about how to deal with the crisis, but Yellen was charged with bringing the economy back to normal.
With quiet competence and great patience, that’s precisely what she did. The US is now experiencing 3.25% economic growth, household spending has expanded, business spending is up, and exports are swelling. The unemployment rate is at an almost all-time low, and some project it will continue dropping, to below 4%.
Yellen’s tenure is also being praised by her peers: 60% of economists (paywall) surveyed by the Wall Street Journal gave her an A on her time as Fed chair, compared with 34% for Bernanke.
On Wednesday (Dec. 13), the Fed announced its third rate hike this year, a move increasingly seen as routine. Most members of the Federal Open Market Committee (FOMC) think rates will continue to climb in 2018.
But it wasn’t so long ago that rates were at historic lows, with nary a hike in sight. In addition to reducing interest rates significantly during the financial crisis, the Fed leaned on another policy tool: buying up assets in order to flood the economy with liquidity. It wasn’t until 2016 that the federal funds rate, which sets the tone for rates in the broader economy, rose above .25%.
Today, Yellen believes the fed funds rate is almost at neutral, which means it’s neither boosting or restraining the economy. That’s a crucial shift, and not just because a neutral rate indicates business as usual. It’s critically important that interest rates aren’t too low, because adjusting them is the Fed’s primary lever when staring down an economic crisis.
Unwinding the balance sheet
In September, Yellen set in motion the gradual unwinding of another crisis-era policy: the Fed’s $4.5 trillion stimulus plan.
After the financial collapse, the Fed embarked on an unprecedented quantitative-easing program (QE), whereby it bolstered close-to-zero interest rates by electronically generating new money to buy securities. The program let policymakers buy longer-term bonds on a large scale, in the hopes that doing so would bring down long-term rates, too.
People feared that unwinding the program would startle markets and shock the economy. But when Yellen announced it, markets barely stirred. Why? She had long prepped them for the moment, which consequently came as little surprise.
Taking stock of changing technology
Still, Yellen leaves the Fed with many unresolved questions. Why is inflation so stubbornly weak? What does the relentless rise of bitcoin mean for all currencies? Ask around, and you’ll find many opinions and theories as to how the central bank should treat digital currency, if Amazon has mucked up inflation, and whether the Fed’s 2% inflation target still makes sense.
In her final press conference Wednesday, Yellen clarified some of her own thinking on these issues. She acknowledged that inflation is surprisingly low, and is both hopeful it will rise next year and open to the idea that something structural might have changed. On crypto, Yellen believes bitcoin is a purely speculative asset that’s nowhere near ready to be thought of as a regular currency. As far as she can tell, the Fed’s only duty is to make sure that banks who do engage in bitcoin transactions are regulated properly.
It’s hard to say if Yellen’s opinions will reflect the central bank’s views come next year—Jerome Powell will take over the Fed, and the Trump administration is already nominating new people to other vacant FOMC spots. But regardless of where monetary policy goes from here, Yellen deserves a cheer.