Too Bad Yellen Isn't Staying; We'll Miss Her
Looks like doing a great job under difficult circumstances with dignity and humility isn't enough these days. In passing over Janet Yellen for a second term as Federal Reserve chair, Donald Trump opted against stability in one of the world's most powerful economic posts.
Even aside from the bipartisan tradition of re-appointing Fed chairs, her performance warranted a second turn. Yellen managed three crucial policy steps without a major disruption. On her watch, the Fed ended the huge bond buying program known as quantitative easing and raised interest rates and has begun the process of reducing the central bank's balance sheet.
Trump said he is a fan of low interest rates. (What political leader isn't?) Yellen has been cautious about raising them, perhaps a little too cautious in 2015 and 2016. But rates are still likely to go up, with or without Yellen.
The Federal Open Market Committee has penciled in one more increase at yearend and several more next year. That’s likely to remain the plan even under a new chief; the committee just doesn't pivot quickly, absent a systemic crisis. Yellen was adept at forging consensus around objectives and routes to them. It remains to be seen whether her successor will have the same skill.
Yellen's performance wasn't perfect. There was too much stop-start, go-no in 2015 and 2016. The FOMC began each of those years projecting four increases apiece. In the end, it did only one in each of those years, both in December. So skepticism that it would follow through on their plans this year was justified. But give them credit, this year Fed officials were more astute than markets. The past two years, the roles were reversed.
In retrospect, the decision to forgo most of the heralded rate increases in 2015 and 2016 was probably a mistake. The big idea was that market ructions in China and sluggish global growth made it sensible to demur. Turns out the world economy had a little more juice than was apparent at the time.
People who think central banks are way too open and say too much about their intentions are unlikely to mourn Yellen's departure. As deputy to Ben Bernanke, she played a key role in developing the Fed's communications policy. It's entirely possible that has robbed investors of the ability to think for themselves. (See an unseemly little spat in Canada.)
Lastly, there is the case of the missing inflation. Yellen didn't crack it. To be fair, nobody has. At least she admits she doesn't fully understand what's happening there. An open file for her successor to investigate and, hopefully, solve.
Yellen should spend her remaining months in office pursuing this one. After that, leave with head held high knowing that her time was a job well done.
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