Yellen prepares for second act at pinnacle of economic policymaking


Shortly after Joe Biden picked Kamala Harris to be vice-president in August, Janet Yellen, the former US Federal Reserve chair, briefed the pair on the slump triggered by the coronavirus pandemic and what they could do about it.

According to one person briefed on the conversation, Ms Yellen told the Democratic ticket that interest rates were low and likely to stay there for a long time, creating considerable fiscal space for new stimulus and investment.

The intervention was well-received by Mr Biden and Ms Harris, whose economic plan calls for billions of dollars of government spending. Now Ms Yellen, 74, is set to be nominated by Mr Biden to be the next US Treasury secretary, handing her a second act at the pinnacle of American economic policymaking.

Ms Yellen is a well-known quantity both nationally and internationally, given her four years at the helm of the US central bank between 2014 and 2018, fitting well with Mr Biden’s drive to fill his cabinet with competent institutionalists after the disruption created by President Donald Trump.

“Janet Yellen’s appointment will be universally welcomed, and rightly so, including by economists, foreign officials and markets, all of whom regard her as a highly experienced policymaker who delivered years of stability,” said Mohamed El-Erian, president of Queens’ College at the University of Cambridge and chief economic adviser to Allianz.

Ms Yellen “understands well the importance of close national and international policy co-ordination”, Mr El-Erian added.

If Mr Biden follows through with her nomination and she is confirmed by the Senate, Ms Yellen will take over the management of US economic policy at a pivotal moment.

The recovery from the initial impact of coronavirus is showing significant signs of slowing amid fading fiscal support from Congress as new infections surge in many states. Even though a vaccine is on the horizon, many economists fear lasting damage to businesses and the labour market that could weigh on the performance of the economy for years.

And while financial markets appear to be in healthy shape, Mr Trump’s Treasury department, run by secretary Steven Mnuchin, has just moved to close some of the Fed’s emergency lending facilities, triggering a rift with the central bank that Ms Yellen is uniquely positioned to mend.

“I think she will do her best within the legal framework to reinstate as much of those programmes as she can,” said Eric Stein, chief investment officer for fixed income at Eaton Vance. “Given Yellen’s background at the Fed, her views will be very much in line with the Fed and she will want the Fed to be able to provide as much credit to various sectors of the economy as possible.”

Ms Yellen was born and raised in Brooklyn, New York, did her undergraduate studies at Brown University and earned her doctoral degree in economics at Yale University, where she specialised in the labour market.

Her government career took her to the Fed — where she met her husband George Akerlof, a fellow economist and Nobel laureate — and eventually into the White House as chair of the council of economic advisers under Bill Clinton.

Later, she would return to the US central bank as president of the San Francisco Fed in the years leading up to the financial crisis and at the beginning of the great recession, and later as Fed vice-chair.

When Barack Obama chose her to succeed Ben Bernanke as Fed chair in late 2013, he joked that she was “tough, not just because she’s from Brooklyn” and credited her with sounding an early alarm about the housing bubble.

“She doesn’t have a crystal ball, but what she does have is a keen understanding of how markets and the economy work, not just in theory but in the real world,” he said.

During her time leading the Fed, Ms Yellen presided over the start of the post-crisis tightening of monetary policy, ushering in a cycle of interest-rate rises that she approached cautiously, pausing along the way.

For some liberal economists, even those moves were excessively hawkish, and in retrospect the Fed disavowed them on the grounds that the economy could have benefited from sustained easy money without triggering a dangerous inflation spike.

Over that period, Ms Yellen’s tenure was marked by other changes at the Fed that have endured under her successor Jay Powell, including a growing focus on disparities in income and the role played by gender and race — issues that the central bank did not traditionally factor into policymaking.

Mr Trump even considered offering Ms Yellen a second term as Fed chair, but demurred after his aides thought it best that he select his own nominee. The president also questioned whether Ms Yellen, who is 5 feet 3 inches tall, was too short for the job, according to The Washington Post newspaper.

After leaving the Fed, Ms Yellen took a position as a fellow at the Brookings Institution, a Washington think-tank, and occasionally lamented the US president’s attempts to undermine the central bank’s independence as well as the administration’s lack of global economic leadership.

In an interview with the Financial Times in October 2018, Ms Yellen said that Mr Trump’s relentless verbal assaults were “whittling away the legitimacy and stature of institutions the public has traditionally had some confidence in”, adding: “I feel it ultimately undermines social and economic stability.”

As Treasury secretary, Ms Yellen will be forced to enter the political fray more than in her previous roles. Although she faced frequent grillings from Congress as a Fed official, including her own confirmation hearing, she will now have to negotiate with recalcitrant Republicans measures to boost the economy, and defend them to a deeply polarised American electorate.

Crucial to her nomination to the Treasury is the fact that she successfully managed to endear herself to the progressive wing of the Democratic party in recent years — more so than Lael Brainard, a current Fed governor who was also a leading contender for the Treasury job.

Not only did Ms Yellen stress America’s capacity to engage in deficit spending during her call with Mr Biden and Ms Harris in August, she also penned an op-ed in The New York Times newspaper that month with Jared Bernstein, a member of Mr Biden’s transition advisory board, appealing for large-scale stimulus.

“If senators still fail to resolve stalled negotiations . . . millions of needy Americans will suffer — and the overall economy could degrade from its current slow rebound in growth to no growth at all,” they wrote.

On Monday, Ms Yellen received a ringing endorsement from Elizabeth Warren, the Massachusetts senator known for her very liberal views on economic policy and hardline positions on banking regulation.

Ms Warren’s support suggests there could be little backlash from the left to her nomination, at least initially, of the kind that dogged former Treasury secretary Tim Geithner under Mr Obama.

“She is smart, tough, and principled. As one of the most successful Fed chairs ever, she has stood up to Wall Street banks, including holding Wells Fargo accountable for cheating working families,” Ms Warren wrote in a tweet that described Ms Yellen as an “outstanding choice”.

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