Janet Yellen's Fed legacy: Turning crisis into calm
Janet Yellen's legacy is a slow unwinding of her predecessor's emergency measures to combat the 2008 financial crisis. Cautious, calm and steadfast -- these are the qualities that Yellen has studiously exhibited during her four-year tenure as Federal Reserve chair, as she inches monetary policy back toward more normal levels.
"A gradual rate increase remains appropriate," said Yellen as she made her valedictory appearance Wednesday after the Fed policymaking committee's voted to boost interest rates again by a quarter-point. She underscored her commitment to a gradual effort to lift what still are very low short-term interest rates.
The first female Fed head leaves office with the central bank set on a firm course to keep raising rates and whittling down its vast trove of bonds. While inflation remains under her 2 percent target, which she believes is the hallmark of a sturdy economy, and wage growth remains sluggish in much of the country, she can point to some progress in realizing her goals.
"She can claim success in beginning policy normalization," said Alan Levenson, chief US economist for T. Rowe Price. "It's like the Serenity Prayer: She has accepted the things she cannot change and changed the things she could."
So she has kept to her steady, if not plodding, strategy, deviating only when economic snags arose -- and her response was to call a time-out, not change direction. Despite clamors from all sides that she should either be moving faster with interest rate hikes (to forestall inflation) or slower (so not to derail the slow economic recovery), Yellen kept insisting that her reliance on "what the data show" dictated her moves. In a standard remark at the Fed's September press briefing, she noted that the central bank was "always watching the economy and will adjust policy as appropriate."
Notably, the Fed paused its plan to keep hiking rates in 2016 amid some worries about sluggish economic advances. After years of near-zero rates post-crisis -- kept low to prompt lending and revive the shell-shocked economy -- the Fed eased them up just once in 2015 and once in 2016.
Only this year has there been a spurt of Fed activity, as US GDP shot above its chronic 2 percent annual growth level and unemployment plummeted to 4.1 percent. In 2017, the Fed has hiked rates three times, counting Wednesday's announcement.
If the Fed continues with its present intentions after Yellen leaves on Feb. 3, it will raise rates three times next year, in quarter-percentage-point increments. Historically, that would still leave them on the low end, at 2 percent to 2.25 percent -- compared to the historical range from 3 percent to 5 percent. Jerome Powell, her designated successor, has indicated a preference to follow Yellen's lead on rates.
By the same token, Yellen has commenced slowly, ever so slowly, to shrink the enormous size of the Fed's balance sheet. Its holdings swelled to almost $4.5 trillion nowadays from $905 billion in September 2008, at the outset of the crisis. To stimulate the economy amid the Great Recession, the Fed bought huge quantities of Treasury bonds and mortgage-backed securities, with the aim of keeping their prices high and yields low as a way to promote private-sector borrowing.
Typically, Yellen's asset-disposal program is starting at an unhurried pace: $10 billion in securities per month, eventually increasing to $50 billion. The projection is that the reductions will level off with Fed assets reaching $2.5 trillion at the lowest, still far above the usual point. The Fed lowers its bond stash by not reinvesting the proceeds when some of them come due, instead of rolling over everything at maturity as it had been doing.
The low rates and asset purchases were the brainchild of Yellen's predecessor, Ben Bernanke -- extraordinary measures to counter a threat to the world financial system posed by the disintegration of the US housing sector. As Bernanke's vice chair, Yellen helped him implement these crisis moves. "She's not an innovator," said Michael Cuggino, head of the Permanent Portfolio Family of Funds. "She's been a caretaker, someone who is managing the exit strategy."
A longtime academic and Democrat, Yellen is the first Fed chair in almost four decades not to be named to a second term. A tradition emerged of Democratic presidents reappointing GOP chairs, and vice-versa. As a candidate, Donald Trump castigated her for keeping rates too low in what he called a ploy to aid Hillary Clinton in her attempt to retain Democratic control of the White House. But as president, Mr. Trump changed his rhetoric to praising Yellen ("a wonderful woman who's done a terrific job"), although he's replacing her with Powell, a Republican and Fed governor, who has worked with her to enact her program.
While her tenure hasn't been marked by rancor toward her -- Yellen has a pleasant, unflappable personality that makes her hard to dislike, even in the current knives-out Washington climate -- her moderate policies have drawn criticism. William Spriggs, the chief economist at the AFL-CIO, recently knocked the Fed for not doing more to lower the low unemployment rate even further.
A group of Republicans in Congress has pushed to give Capitol Hill greater oversight of Fed actions, a term known as auditing the Fed. Arguing that such a shift would erode the Fed's independence, Yellen personally buttonholed lawmakers before a vote on the proposal. The audit measure got sidelined in Congress earlier this year, but it could come back to haunt her successor.
All in all, Yellen departs her post with high marks. A recent Wall Street Journal survey of economists had 60 percent giving her an A (30 percent gave her a B, 8 percent a C and 2 percent a D). At 71, she leaves the Fed with a panoply of career possibilities, including returning to academia or maybe joining the private sector, as Bernanke did (he's now part of the Citadel hedge fund).
"She had a successful tenure," said Myles Clouston, senior director of Nasdaq Corporate Solutions Advisory Service. "It was even-keeled, steady as she goes."