The Tragedy

The Tragedy of Janet Yellen

By any measure, she was one of the most successful Fed chairs in history. Why didn’t Trump keep her around?

By SAM BELL

In December 2012, a new Federal Reserve governor and unseasoned monetary policymaker, Jerome Powell, told his colleagues that the risks of continued stimulus likely outweighed the benefits. Vice Chair Janet Yellen, even then one of the most experienced policymakers in the Fed’s 104-year history, acknowledged the concerns but pushed back forcefully. She argued 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.” In other words, if we don’t take risks now to get more Americans employed, the country might lose the opportunity to ever fully recover from the Great Recession. She reminded her colleagues of the promise they had made: “We communicated that we will at least keep refilling the punch bowl until the guests have all arrived, and will not remove it prematurely before the party is well under way.”

On top of the usual partisan motivations, Yellen’s forceful advocacy for full employment generated broad and fierce resistance when she was nominated to succeed Ben Bernanke as Fed chair. For most of the GOP, the party had already gone on too long! Many conservative economists were skeptical that unemployment could be lowered to prerecession levels and even if it could, the costs—accelerating prices brought on by trillions of dollars in Fed money creation—would be too great to bear. Senator Pat Toomey of Pennsylvania warned that "the danger of a dramatic spike in interest rates, unsustainable asset bubbles, and job-killing inflation will be exacerbated as long as the Fed keeps these policies in place.” Iowa Senator Chuck Grassley predicted a return to the stagflation of the late 1970s. And John Cornyn of Texas, the No. 2 Republican in the Senate, perhaps summed things up best when he said, “Ms. Yellen subscribes to the liberal school of thought that the best way to handle to our nation’s fiscal challenges is to throw more money at them." She was confirmed as the first female Fed chair in American history with the lowest-ever support in the Senate.

Looking back at the end of her four years at the helm of America’s central bank, there are certainly valid questions to raise about Yellen’s tenure. Some argue that she is too sanguine about the power of regulations to stop the next financial crisis and that she has gone easy on, for example, Wells Fargo. Others worry that she has not done enough to ease up on rules affecting smaller banks. She has consistently predicted a return to 2 percent inflation that never quite materialized (it’s at 1.8 percent now). Monetary doves, fearful that Yellen might repeat the Japanese mistake of choking off the recovery prematurely, were aghast when she raised interest rates in December 2015. Most importantly, with short-term interests still quite low it is not clear how the Fed will fight the next recession—today the central bank would have little room to use its conventional tools and would face much internal and external debate about the effectiveness and appropriateness of its unconventional ones.

And yet on the critical issue at hand in her 2014 nomination—could we bring more unemployed workers back into the labor force without blowing things up for everyone else?—she has been unquestionably vindicated. It is not even a close call. Not only were the predicted catastrophe avoided, but there is a strong case—especially with inflation still below the Fed’s target—that Yellen could have taken more risks to stimulate the economy. The unemployment rate has dropped from 6.7 percent to 4.1 percent. Millions of Americans re-entered the labor force. Low-wage workers are seeing the largest wage gains and the least educated workers are seeing some of the biggest jumps in employment. The New York Times recently reported that “a rapidly tightening labor market is forcing companies across the country to consider workers they once turned away,” included those just released from prison. Without much help from fiscal policy, it was Yellen’s willingness to hold off on “normalizing policy” that allowed for these much-needed outcomes.

Here’s the tragedy: As Scott Sumner of the conservative Mercatus Center put it recently, “Yellen is on a glide path to near perfection, as she will probably end her term achieving the Fed’s dual mandate better than any other chair in history.” And yet she is the first chair in modern Fed history not to be renominated after serving a full first term. Her predecessors served at least twice as long—Paul Volcker and Ben Bernanke for eight years and Alan Greenspan for 18—and each was reappointed by a president of the opposite party.

Yellen’s critics in the Senate haven’t admitted they were wrong about her, and yet they overwhelmingly voted to confirm Powell as her successor despite his vigorous defense of Yellen’s legacy and pledge to continue her policies. Hopefully, he imitates her patient, balanced approach and is also willing to take risks to achieve maximum employment. And hopefully Americans will remember Yellen’s admonition—“keep refilling the punch bowl until the guests have all arrived.”