Janet Yellen's Final Exam

Although he professes to “really like her a lot,” President Trump appears to have made up his mind that that the next chair of the Federal Reserve won’t be the incumbent of the past four years, Janet Yellen.

On Tuesday, according to media reports, the president asked Republican senators for a show of hands on whether they favored current Fed governor Jerome H. Powell or John B. Taylor, the Stanford University economics professor and frequent Fed critic. Results of the informal vote weren’t disclosed. On the same day, the New York Times ran an article comparing the “finalists” for the Fed chair position, mentioning only Powell and Taylor, even though the White House has said Trump is considering three additional candidates, including Yellen.

So it now looks like it’s a two-man race between Powell and Taylor. Trump has promised to make an announcement any day, at least before his trip to Asia at the end of next week.
Regardless of who he chooses, it’s certainly an appropriate time to review Yellen’s tenure as Fed chair, either as a historical exercise or as an indicator of what we can expect for the next four years in the event she is reappointed. Let’s look at some of the main points.

Transparency:

Although the Fed historically has gotten a lot of grief for deliberating in secrecy, I don’t think Yellen – or her successor, Ben Bernanke, with the one exception of the “Taper Tantrum” – can be accused of failing to give the public and the financial markets a long head’s up on what they expect to be doing regarding monetary policy and interest rates.

Decisiveness:

If anything, the one thing the Yellen Fed can be faulted on is failing to act after it indicated or implied that it would. (Note that the Fed never actually “says” it’s going to do something until it actually does so). Over the past four years, the Fed has repeatedly backed off from or delayed an action it had telegraphed earlier, whether it’s due to “data dependency” when U.S. economic indicators failed to come in as expected, or some external “crisis” like the U.K. Brexit vote or the drop in the Chinese stock market last year.

Cluelessness:

Speaking of which, I have been astonished by the number of times the Fed has found itself blindsided by the release of an economic statistic – jobs, usually – that has gone against what it was expecting and forced it to back off from making a decisive move, such as raising the federal funds rate. Is it really possible that the Fed doesn’t know well in advance what the Labor Department or some other government agency is going to report? And even if these agencies don’t actually share their data with the supposedly “independent” Fed, certainly the central bank’s army of professional economists and research analysts should know what’s coming. Too often it appears as if it doesn’t.

Independence:

If I had a billion dollars for every time I heard that the Fed is “independent” or “not political” I could balance the federal budget tomorrow. In fact, Yellen, a Democrat, bent over backward to accommodate the failed economic policies of the Obama Administration, refusing to raise interest rates in order to give the deliberately-suppressed economy any artificial boost that it could. I don’t necessarily think it’s wrong to do that, but let’s not pretend that the Fed chair doesn’t do the bidding of the president or party who appointed her (or him). After all, they supposedly believe in the same things. Otherwise, they wouldn’t have been nominated in the first place.

Bank Regulation:

One of the main things that may count against Yellen’s reappointment is that she may not be entirely on board with the Trump Administration’s agenda to deregulate the financial services industry, chiefly by dismantling parts of the Dodd-Frank law. In her most recent comments on the subject, Yellen indicated that she is open to making some changes, particularly as they apply to smaller, regional banks that played little or no part in causing the financial crisis. Whether that’s enough to win her another term, I don’t know.

However, the Fed has been extremely slow in coming down on the most “egregious” (Yellen’s word) example in memory of a major bank preying on its customers. I’m talking of course about Wells Fargo. In one of my recent columns I called for the Fed to throw the book – and a minimum fine of $1 billion– at the bank for its many scandals that have been disclosed over the past year or so.

Not only has the Fed yet to penalize Wells, but it's also hard to believe that as the bank’s principal regulator it didn’t have at least an inkling of the bank’s bad behavior and sales practices, which apparently stretch back more than a decade. How could it not have known? And if it did, it’s reprehensible and inexplicable that it allowed it to continue for so long.

Inflation:

As I’ve said before in this space, I’ve been mystified by the Fed’s concern that inflation is too low, which it uses as an excuse not to normalize monetary policy so long after the financial crisis ended. Fixating on inflation that is too low – as opposed to too high – is simply an academic exercise and just another excuse not to act. There will be plenty of inflation in the future the longer the Fed fails to raise rates and unwind its massive balance sheet.

Market Stability:

Last but not least, Yellen will be given credit for keeping the eight-year-old stock market rally alive through the Fed’s easy-money policies. Whether it’s the Fed’s job to keep stock prices high is another matter, but probably most investors don’t care about that – they only care about making money.

On balance, then, I would give Yellen a passing grade, but she could have done a whole lot better. I’m afraid that’s not good enough to warrant a second term.

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George Yacik
INO.com Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.