On February 3rd, Janet Yellen concluded her four-year tenure as Chairwoman of the Federal Reserve. On the eve of her handing over the reins to newly confirmed Chairman Jerome Powell, Vice News Tonight ran a segment lauding Yellen as “one of the most effective” Fed chairs in history. The story featured an oft-cited quote by the Mercatus Center’s Scott Sumner praising Yellen’s performance: “Yellen is on a glide path to near perfection.”
Yellen’s success is hard to dispute using the Fed’s own criteria: its dual mandate. The Fed’s dual mandate gives it two main policy objectives: maintaining full employment and achieving low and stable rates of inflation. In her four years at the helm, unemployment fell from 6.7 percent to 4.1 percent — slightly lower than most estimates of full employment. Inflation consistently hovered just below the Fed’s 2 percent target. With these results, it is no surprise that President Trump’s decision not to reappoint Yellen has been met by many Beltway pundits as a “tragedy.”
Yellen has certainly accomplished hitting the Fed’s goals during her brief tenure. But that doesn’t necessarily mean that her tenure will be or should be considered a success.
The Dual Mandate and Normalization
First, let’s return to the Sumner quote that has made the rounds across a variety of news outlets. His full quote reads as follows: “Yellen is on a glide path to perfection, as she will probably end her term achieving the Fed’s dual mandate better than any other chair in history.”
What’s conveniently neglected in these stories is that Sumner also argues the Fed’s dual mandate is, quite frankly, a pretty lousy policy regime. It, therefore, might not be the best standard to judge Fed chairs on. Sumner himself strongly favors a nominal GDP price level targeting regime. By this standard, Yellen’s performance, while admirable, has been far from historic.
Its balance sheet remains bloated, and its footprint on the amount of credit in the economy remains as deeply entrenched as ever. But there’s an even more fundamental critique of Yellen’s tenure. For all her short-term successes, Yellen’s Fed did very little to undo the damage of Bernanke’s Fed. And it did even less to put monetary policy on a sustainable long-run path.
For years, Yellen promised a “normalization” of monetary policy whereby the Fed would begin drawing down its QE-bloated balance sheet and return to relying on the federal funds rate as the primary instrument of monetary policy.
Normalization was a risky prospect for the Fed. Sell off assets too fast, and the fragile recovery might spiral back into a full-fledged financial crisis. So, Yellen ultimately followed her predecessors' lead and elected to kick the can down the road. The Fed’s normalization has crawled forward at a SNAIL’s pace.
Its balance sheet remains bloated, and its footprint on the amount of credit in the economy remains as deeply entrenched as ever. All this has served to bog down the private banking sector's ability to spur sustainable economic growth.
Going Out on Top
Regardless of how things pan out, I imagine history will judge Yellen far more favorably than I. None of this is to say that Yellen did a “bad” job. It’s too early to render any final grades. But while many seem intent to go ahead and give Yellen an A+, I’d personally give her an “incomplete.” Incomplete because by failing to have the “courage to act” to begin implementing a true policy normalization by getting rid of the Fed’s interest on excess reserves policy and drawing down the Fed’s balance sheet, she and Bernanke have left what could very well amount to a multi-trillion dollar house of cards for ensuing Fed chairs.
Regardless of how things pan out, I imagine history will judge Yellen far more favorably than I. After all, by not reappointing Yellen, President Trump might’ve just delivered her one of the greatest gifts in all of history: the gift of “going out on top.”
Ask any athlete. They’ll tell you it's best to retire at the top of the game like Barry Sanders or John Elway. Don’t wear out your welcome and let your legacy be tainted by the memory of your performance when you were on the decline (remember Michael Jordan’s brief return to the Washington Wizards? Hopefully you don’t). Cut the cord on the show before it has a chance to disappoint everyone (remember the TV shows Lost and Arrested Development? Great starts, terrible endings).
So Yellen ought to enjoy her triumphant ride off into the sunset. By the time the sun sets and things get dark (which, if the recent volatility in the stock market is any indicator, winter may very well be coming), she might be happy she got the heck out of Dodge.