Summary
Janet Yellen left her post on Friday as the chairperson of Federal Reserve with an economy booming and moving further away from the 2008 Global Financial Crisis. However, analysts are reluctant to judge whether her 4-year chairpersonship was indeed successful. Many would argue that her leadership ensured a swift recovery of the US economy. Citing “4 percent unemployment and 1.5 percent inflation”, Fed Vice Chairman Alan Blinder believes that the market is in a much better shape today compared to what it was 4 years ago.
Many attributed the success of Yellen to her intelligence and professionalism. “She is a very smart and dignified woman with good political sense, a sense of diplomacy and decorum, which is something we need in this country,” said Professor Robert Shiller, a Nobel laurate in economics. She was particularly acclaimed for being politically independent, especially during a turbulent and divisive period in Washington politics. Moreover, most people are also convinced that she has left a great legacy to her successor, especially through successfully raising interest rates off the zero-lower bound.
Yet, some critics constantly attacked her policies for being too radical. As many pointed out, this is particularly worrisome because there is a huge tendency that the bond bubbles created during her tenure will burst. Some have been largely uncomfortable with her practice in exerting too much influence over the market. The milder critics on the other hand, gave her credit for the economic prosperity, but they were worried that similar to the fate of Allan Greenspan and his monetary policies, problems would start to develop quickly after Yellen leaves office.
In summary, amid heavy praise and bitter criticism, Janet’s Yellen’s 4-year term as Federal Reserve Chairwoman is yet to be fully assessed.
Janet Yellen exits the Fed on Friday amid heavy praise and bitter criticism
Janet Yellen leaves the Federal Reserve with the economy clicking, the stock market humming and the central bank on a clear path away from the emergency policies it put into place to help rescue the U.S. from the deep throes of the financial crisis.
Yet her grade as head of the Fed is a decided “incomplete.”
Yes, by any typical standard of performance Yellen would be considered an unqualified success. She and her colleagues enacted programs and policies that have brought the economy and financial system back from the brink. She is almost universally respected on Wall Street, even if she remains a bit of an enigma on Main Street.
But no one knows yet what the future ramifications will be of the extreme measures the Fed took under her watch and that of her immediate predecessor, Ben Bernanke.
And for that, Yellen, who exited Friday after a four-term as chair and a 14-year career overall at the Fed, is yet to be judged fully. Her supporters hail her effectiveness at pulling the central bank through the crisis then managing its way back out; detractors say she inflated financial bubbles to get there, the long-term effects of which will be disastrous.
“The thing she’ll be mostly known for is steering the economy into a fabulous position,” said Princeton economist and former Fed Vice Chairman Alan Blinder. “We are now looking at roughly 4 percent unemployment and 1.5 percent inflation. This is better than almost anybody four years ago thought we could do, my guess including Janet Yellen.”
Asked to assess Yellen by the presidential standard — are you better off now than you were four years ago? — Blinder responded, “A resounding yes with at least three exclamation points after it.”
Yes!!! Well, maybe no.
Critics remain convinced that the Fed sold out middle America by using low interest rates and money printing to boost Wall Street while neglecting the plight of many who still feel the stifling effect of the crisis and the stagnant growth that followed.
“She’s an enormously popular chair who has largely escaped criticism because of that. But she’s fairly radical in the things that she and Ben Bernanke did,” said Christopher Whalen, founder of investment bank consulting firm Whalen Global Advisors. “Her actual impact on the markets is very significant and quite radical and yet she’s viewed as basically this nice lady.”
Indeed, the dichotomy between the market and the economy will be one of the most lasting parts of the Yellen legacy: While the S&P 500 is up about 325 percent since the 2009 lows, wage gains have barely kept up with inflation and income inequality has soared.
In short, the trickle-down monetary policy may have brought the economy off its knees, but like a battered prizefighter who barely beat the 10 count, it remains groggy and still susceptible to a knockout punch.
“She was a believer in the powers of central banking,” said Peter Boockvar, chief investment officer at Bleakely Advisory Group. “Her reputation is as a dove. When you look at what’s gone on the past 20 years in terms of monetary policy and booms and busts, being a dove has turned out to be a dangerous situation in that it works for a period of time, and then look at what we get.”
Loose monetary policy has been blamed for at least the last two major market crashes and recessions — the go-go speculation that juiced up the dot-com bubble in the 1990s, and the reckless profiteering that led to the subprime mortgage collapse in 2008.
By now, the Fed’s tools used to fix the economy are familiar: seven years of near-zero interest rates coupled with about $3.7 trillion worth of bond buying that boosted its balance sheet to $4.5 trillion.
The effects: a hard-charging stock market and a fixed income trade that has continuously defied calls for the more than three-decade bull bond run to come to an end. For Boockvar and other Yellen detractors, however, there are more ominous consequences from the Fed keeping its foot on the gas pedal for more than a decade.
“The bond bubble that we’re currently in, she has her fingerprints all over it. The rise in asset prices, she has her fingerprints all over them,” Boockvar said. “If that bubble pops — this book on Janet Yellen is not complete until they get much deeper into the tightening cycle.”
A steady hand
Determining legacies is a complicated and fuzzy process.
Alan Greenspan, too, guided the Fed through a period of immense economic prosperity, but many also blame him for the reckless abandon — “irrational exuberance” in The Maestro’s own words — in financial markets through the 1990s and then again in the early part of the 21st century.
In most circles, though, Greenspan gets statesman treatment, and Yellen’s views also are likely to be widely sought once her exit is official. She will join the Brookings Institution, a left-leaning think tank, starting Monday, just like Bernanke after he left.
Especially in light of the turmoil that has engulfed Washington over the past year, she’s seen as one of the few sources at the higher echelons of public discourse who has not gone politically nuclear. (Yellen, through a Fed spokesman, declined comment for this article. At her final news conference in December, she called her time at the Fed “an immensely rewarding experience” but did not delve into her feelings about not being reappointed.)
“She is a very smart and dignified woman with good political sense, a sense of diplomacy and decorum, which is something we need in this country,” said Robert Shiller, a Nobel laureate Yale economist and co-author of two books with Yellen’s husband, George Akerlof.
“She came in as vice chairman in 2010 after the crisis, and we’ve had kind of a funny recovery,” Shiller added. “It’s been slow but very steady and has brought us to a time with very good growth and low inflation. So judge her by the outcomes and she’s done splendidly.”
Shiller, though, has been a leading cautionary voice about the turbo-charged surge in the stock market.
His proprietary measure of equity prices judged against earnings over the past 10 years — the Shiller CAPE as it is known — shows valuation at its highest level since the turn of the century and well above the Black Tuesday mark that preceded the devastating 1929 crash.
Should the gauge again prove prescient and the market enter a sharp downturn, that would define the Yellen legacy in a whole new way. As the Fed continues to raise rates and shrink its balance sheet, the risks elevate that what Yellen and her colleagues took so much care in doing could get undone, perhaps quickly.
The questions then will arise as to whether the Fed should have begun tightening long ago, before the market rose so much and when the economy was far enough in the clear from the worst of the financial crisis.
“When you come to actually slamming on the brakes, it’s hard to do. There’s worries about the other side,” Shiller said. “I might have been a little bit more hawkish [as a Fed chair] because of the stock market.”
A surprise one-termer
One can only speculate how a second-term Yellen Fed would have proceeded in terms of rate hikes and balance sheet roll-off, particularly if the U.S. faces difficult economic straits or if stocks suddenly should start to slump.
That’s because President Donald Trump took a step unusual in historical terms — not renominating a Fed chair who had served a full four-year first term. You’d have to go all the way back to Daniel R. Crissinger, who served from 1923-27, to find the last time that happened.
Talking to those who have studied Yellen yields conflicting visions of what happened that led to her departure. Some believe she really didn’t want a second term as she was looking to change directions in her life, while others maintain she absolutely would have served had she been asked.
“I think she has a moral guidance, I would have imagined that she would have wanted to continue,” Shiller said. “On the other hand, I think it is a very stressful job.”
The job could have been made more stressful by a divided Fed.
Amid all the tough decisions over the years, and as officials made public speeches that showed disagreements about policy, Yellen did a remarkable job forging consensus. Most Federal Open Market Committee decisions were made with little or no dissenting votes.
However, Trump has multiple vacancies open now and could end up appointing board members who disagree with Yellen’s direction. Marvin Goodfriend, Trump’s second nominee after Jerome Powell, openly criticized the Fed’s direction a year after Yellen took over.
“I think the leadership of the Fed is very, very poor to say the least,” Goodfriend said at a 2015 meeting of the Shadow Open Market Committee, a panel of experts that periodically analyzes the Fed’s policy decisions.
Trump’s own conflicting views on Yellen are a matter of public record.
During the 2016 presidential campaign, he complained bitterly about the Yellen Fed and what he saw was its use of overly accommodative policy to boost the economy under President Barack Obama and strengthen the chance for a Hillary Clinton victory in the election.
However, after taking office, the tone changed. Trump praised her until the end, and was uncharacteristically circumspect when discussing why he chose Powell as Yellen’s replacement.
The rhetoric, at least, out of the administration has been nothing but laudatory regarding the outgoing chair.
“Janet Yellen did a spectacular job, and we should all be thankful for what she did in her tenure at the Fed,” Gary Cohn, director of the National Economic Council and Trump’s chief economic advisor, told CNBC in a recent interview.
Her supporters fume, though, that Trump refused to reappoint her, though they are somewhat comforted by the choice of Powell, who is expected to be slightly more hawkish on rates and the balance sheet and a bit less stringent on regulations than his predecessor.
“Her legacy is going to be twofold: One is that she was a fabulously successful chair of the Fed for four years, and two is the disappointment that she didn’t get reappointed,” Blinder said. “This is probably one of the lesser damages of the Trump administration because Jay Powell is a perfectly competent person. But it is a break with precedent for no good reason.”
‘Nothing broke’
Few could blame Yellen for being at least a little bitter at not being reappointed.
After all, she and Bernanke clamored for years for Congress to get more proactive with fiscal policy — investments in the economy that would boost lagging production, raise the standard of living and take the heat off central bankers — and there’s now a much friendlier climate to that way of thinking.
Congress has passed the most aggressive tax-cut package in U.S. history and is ready to embark on what Trump sees as a $1.5 trillion infrastructure plan that would combine federal outlays with funds from states to fix the nation’s aging system of roads, bridges and public works systems.
That all will ease the need for the Fed to dip into its bag of tricks. Yellen, however, will bear witness only from the sidelines, having done the heavy lifting while Powell is charged with carrying on her work.
“She leaves her successor in terrific shape,” said Boston College economist Peter Ireland, another member of the Shadow Open Market Committee. “She successfully raised interest rates off the zero lower-bound and she put into place a policy framework for reworking the size of the Fed’s balance sheet back down.”
Broadly speaking, the economy is coming off a much improved year, and the Atlanta Fed is projecting GDP growth to hit a whopping 5.4 percent in the first quarter, which would be the best since the recovery began in mid-2009.
“What that gives Powell now is a window of opportunity where policy is kind of on autopilot,” Ireland said. “He has a window of opportunity to formulate his own strategy without the stress of cleaning up a mess that’s left over or fighting a fire that continues to burn.”
Market participants certainly have come to appreciate Yellen even if they weren’t happy about her at first.
The early days of her tenure came with a few public gaffes that left the market wondering whether she indeed would be as dovish and carry on Bernanke’s work, or whether more “taper tantrums” would come like the one when Bernanke indicated that the money-printing operations were coming to an end.
Ultimately, she was able to begin the reversal of policy that some on Wall Street thought was a permanent exercise in rock-bottom rates and Fed easing every time the market got into trouble.
“There’s an old expression from the trading floor: ‘When rates rise, something always breaks,'” said Quincy Krosby, chief market strategist at Prudential Financial. “Nothing broke during her tenure. That’s the point.”
Critics will be watching
That’s not to say nothing will. If the economy and markets falter, the timing will be critical for the degree to which Yellen is held responsible.
If something substantial were to happen in, say, the next year or so, Yellen’s legacy will be tarnished. Beyond that, Powell will have to own whatever crisis eventually comes along.
“The question has been, did normalization take too long under her tenure, should the Fed have been tightening sooner?” Krosby said. “There’s a tug of war between economists and market strategists. The fact is, fiscal policy introduced by the Republicans and the president has helped the Fed make this transition, demonstrably so.”
Others, though, are less gentle when evaluating what the Yellen/Bernanke Fed has wrought.
“She managed to get out of Dodge,” said Peter Schiff, an economist and founder of Euro Pacific Capital who has been predicting Fed-induced economic catastrophe going back to before the financial crisis. “She handed the baton to Powell, but the baton is really like a stick of dynamite. We just don’t know when it’s going to blow up.”
“Powell is inheriting a tough legacy from Yellen and Bernanke because of their willingness to experiment on us,” added Whalen, the investment banker.
There’s more, though, to evaluating the Yellen legacy than interest rates and balance sheets and stock market price.
As the Fed’s leader, she was also responsible for overseeing the banking system, which has gotten far safer if somewhat less profitable in the postcrisis years. Bank capital has surged while risk-taking has fallen mostly away, replaced by a more boring model that nonetheless continues to draw critics.
The industry itself has offered only scant complaints, mostly coming from community and regional bank officials who think it’s unfair that they’re held to the same standards as their much larger Wall Street counterparts.
“She believes strongly in what was being done to rein in the banks. She believes strongly in maintaining high levels of capital, high levels of liquidity,” said Dick Bove, the Vertical Group banking analyst. “She believes the Fed should have a very strong oversight of virtually every activity that banks are involved in.”
Beyond that, Bove sees the legacy that Yellen leaves behind less cut and dried.
“The employment rate is very high, the economy does seem to have turned around,” he added. “I do think we’re in better condition now than when she took control of the Fed. But I honestly don’t believe she had anything to do with that.”
The latter remark may be a brash statement to make, but it reflects a widely held sentiment by many of the sources interviewed for this report, namely that Yellen and other central bank officials are credited with far too much influence on the economy and markets.
In this age, though, of increasing involvement and aggressive measures that are unprecedented in central banking history, Yellen and her successors are likely going to have to wear what happens beyond the Fed’s halls.
“By standard measures of growth, inflation and unemployment, she has been a big success,” said Shiller, the Yale economist. “The problem is, the same thing happened to Alan Greenspan, who looked really successful when he held office but problems developed later. You never know about those kinds of things.”
Source: CNBC, Jeff Cox, Feb 2, 2018. Photo credit to CNBC.