Janet Yellen gave the Federal Reserve a much-needed reality check

Of the people, by the people, for the people.
Of the people, by the people, for the people.
Image: Reuters/Carlos Barria
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In 2014, Janet Yellen became the first woman to head up one of the world’s most powerful economic institutions, the US Federal Reserve. Indeed, by some measures, she became the most powerful woman in the world.

Yellen’s ascension at the 105-year-old central bank was a victory for a field that struggles to attract and elevate women—and a moment for women everywhere who strive to increase the influence of their work.

Now, as she chairs her final meeting of the Fed’s governing board, it’s worth stepping back to consider Yellen’s modest but momentous tenure, which will be remembered for much more than busting a gender barrier. With quiet confidence, she made it clear that monetary policy ultimately is about people, something that often gets lost amid abstract arguments about interest rates and inflation.

She saw the 2008 financial crisis coming

In a June 2007 policy meeting, Yellen, then head of the San Francisco Fed, predicted the global financial crisis that would arrive in full force the following year, telling her colleagues, “I still feel the presence of a 600-pound gorilla in the room, and that is the housing sector.”

At their next meeting, about a year before Lehman Brothers would go bust, she again warned of a crisis, forecasting how it would play out: “A big worry is that a significant drop in house prices might occur in the context of job losses, and this could lead to a vicious spiral of foreclosures, further weakness in housing markets, and further reductions in consumer spending.”

Today, a smattering of economists and traders claim to have predicted the crisis. There’s no debate that Yellen belongs in this exclusive group.

“This is something our country should never live through again”

Yellen, in the face of skepticism from her colleagues, changed what it meant to be a central banker. For starters, she helped the obscure institution stretch beyond its comfort zone of buying and selling bonds and fine-tuning the economy, to make it responsible—and accountable—to America’s poorest.

“My mother and father were pretty traumatized by the Depression,” Yellen said in an interview with Berkeley’s Haas business school. “I remember thinking, this is something our country should never live through again.”

That thinking surfaced when central bankers were knee-deep in debate about what would best help the economy recover from the crisis. “We face a profound risk that slow progress in moving the economy back toward full employment will not only impose immense costs on American families and the economy at large, but may also do permanent damage to the labor market,” she said in a December 2012 meeting. With wages stubbornly low and unemployment high, she worried her team would roll back policy too quickly.

“We do not intend to take the punch bowl away just as the party is getting going”

Yellen’s colleagues believed that after the global financial crisis, unemployment might be permanently higher.

She fought against this notion.

“The bottom line for me is that we likely will need to maintain the current stance of policy for a very long time to get back to full employment,” she told her colleagues in 2009, when Ben Bernanke was Fed chairman. “My main concern is that markets will anticipate and we may be tempted to withdraw our accommodation too soon, thereby aborting the recovery.”

Sticking to her guns and insisting that monetary policy ought to work for the unemployed made an impression. “I think she is fundamentally committed to continuity, that we still have a problem and we still need monetary policy to be doing a fair amount,” Christina Romer, a former chair of US president Barack Obama’s Council of Economic Advisers and an old friend of Yellen’s, told the New York Times in 2013.

“There’s a toughness there. And I think there’s a toughness to her that there isn’t in Bernanke.”

“The well-being of American households and workers”

As Fed chair, Yellen steered America’s central bank through many firsts—raising rates after they hit historic lows, unwinding the Fed’s controversial $4.5 trillion stimulus plan, and addressing the rise of cryptocurrencies.

But after 13 years as a central banker, she hasn’t let the technicalities of models or the workaday language of monetary policy distract from what defines economic progress.

“We have created 17 million jobs,” she told a room full of reporters in her final press conferences as Fed chair. “We’ve got a good, strong labor market and a very low unemployment rate, and I think that’s been tremendously important to the well-being of American households and workers.”