In praise of Yellen

Federal Reserve Chairwoman Janet Yellen speaks at New York University’s Stern School of Business on Nov. 21.
Federal Reserve Chairwoman Janet Yellen speaks at New York University’s Stern School of Business on Nov. 21. AP

This week we learned that Federal Reserve Chairwoman Janet Yellen will leave the central bank when her successor, Jay Powell, is confirmed and sworn in, probably within the next few months. Though she had the option to do so, Yellen chose not to stay on the Fed’s board (only one former chair has done so in the history of the Fed).

I’ll be sad to see her go. In a moment marked by political chaos, terribly nonrepresentative politics and men abusing their power, Yellen has been a trailblazing woman in a male-dominated field, applying her big brain and equally large heart to the challenges presented by the modern economy. Though lots at people, including myself, snipe at the Fed, the U.S. economy’s record under Yellen speaks for itself. Here are some of her accomplishments.

▪ Pressing for full employment: Yellen became chair of the Fed in February 2014, when the unemployment rate was close to 7 percent. When she leaves, the rate will probably be around 4 percent, if not lower. Let us pause for a moment and examine why this trend is such a testament to her success.

It’s not so much that the Fed sets the unemployment rate, which, along with Fed interest-rate policy, is a function of overall global growth (and its distribution), productivity and changes in the supply of goods and services to the economy. It’s more that the central bank either accommodates an ongoing decline in the jobless rate or it pushes back against it by hitting the economy’s brakes through interest rate hikes.

Many voices, from both inside and outside the Fed, were telling Yellen to do just that: Stop the fall in unemployment before the economy overheated. She respectfully and transparently said “no,” which is a very good thing, because she was right, and they were wrong.

Even as the jobless rate fell below levels that the Fed believed to be consistent with stable inflation, Yellen carefully watched the gauges for signs of overheating, reminding her critics that she would be “data-driven.” Seeing no inflationary pressures, she correctly concluded that there must be a large margin of error around the Fed’s estimate of the unemployment rate at full employment.

Reading her speeches at the time reveals that she was motivated by a theme I’ve long stressed: If we want the recovery to reach those heretofore left behind, we need to let it proceed, especially given the lack of price pressures. She often discussed this under the obscure rubric of “asymmetric risk”: the risk of inadequate demand was greater than that of “de-anchored” price pressures. It sounds technical, but it’s really a progressive choice, based, as noted, on data, not ideology or theory.

Following the data may sound like nothing more than common sense, but there are ways in which economics training, often accompanied by pro-market ideology, squashes your common sense. Telegraphing my next point on Yellen’s behalf, recall that former Fed chair Alan Greenspan assumed pre-crisis that financial firms would self-regulate, based in no small part on his ideological bias against government regulation.

▪ Regulating financial markets: Yellen does not suffer from that bias. Most importantly, she’s argued that the Fed should beef up its financial-market oversight function to avoid having to increase interest rates to deflate financial bubbles, as that policy route punishes everyone for the excesses of the few.

▪ Clarity: Carrying on the Bernanke tradition, Yellen has been committed to carefully explaining the Fed’s thinking and actions. One notable example is its current unwinding of its highly elevated balance sheet. That buildup was unprecedented, yet Yellen’s “forward guidance” has provided Fed watchers with a clear path for the unwinding, which thus far (granted, these are early days) is occurring without a hitch. If such smooth progress continues, that will signal future Feds that this alternative tool can be safely used in future crises.

▪ Emphasizing for whom she was fighting: Bin Appelbaum of the New York Times reported: “In one of her first public appearances as chairwoman, she went to Chicago to meet with three people struggling to find jobs, then gave a speech declaring her priorities. ‘It is my hope,’ she said, ‘that the courageous and determined working people I have told you about today, and millions more, will get the chance they deserve to build better lives.’ 

Like many past Fed chairs, Yellen thinks about Wall Street’s reactions to her work and statements, but she’s also been uniquely mindful of the impact of Fed policy on the least powerful in the economy, as shown by her commitment to full employment. Under her leadership, the Fed held conferences that touched on inequality, disadvantaged people missing from the labor force, and racial and gender imbalances in the economy. I know, because just a few weeks ago, I was at a Fed conference, chairing a panel on racial segregation. For the record, I was the only male on a five-person panel, which again, is an important sign of progress in this industry.

Nobody’s perfect, and I’m scratching my head as to why a data-driven Fed would be even slowly raising rates recently, as their key inflation gauges are not even close to flashing red. Yellen has also been perhaps too wedded to the Fed’s models, even while it’s clear that their predictions of growth, inflation and interest rates have repeatedly been too optimistic. That said, as is her wont, she’s recently been asking important questions about the fundamentals of those models, suggesting the need for a major, macro rethink. While she’s earned some serious chill time, I suspect and hope she’ll devote some brain power to that rethink.

With that, I can only say: Thank you, Janet Yellen. You’ll be sincerely missed.

Jared Bernstein, a former chief economist to Vice President Joe Biden, is a senior fellow at the Center on Budget and Policy Priorities.