Yellen Legacy Burnished by Job Market Hunch, Crisis Policy Exit – Bloomberg
President Donald Trump said in July that Yellen is “absolutely” in the running to remain at the helm of the U.S. central bank when her term expires in February. That doesn’t mean he’ll pick her, or that she even wants a second term. Yellen has declined to comment on the topic. The White House is also considering other candidates.
Whatever happens, the Yellen Fed has already had a far-reaching impact. Unemployment has fallen to around a 16-year low on her watch without sparking the runaway inflation that some feared. In fact, one of the most serious criticisms of her tenure may be that inflation has failed to rise as expected, and remains well below the Fed’s 2 percent target.
Yellen has also presided over the end of the Fed’s emergency-era bond purchases and mapped out a path to gradually shrink its $4.5 trillion balance sheet—both without repeating the market-roiling taper tantrum of predecessor Ben Bernanke. Some 71 percent of 42 economists in a Bloomberg News survey conducted Sept. 12-14 expect the Fed to announce when it will start the runoff at the conclusion of its meeting Wednesday.
Some of Yellen’s steps would be difficult for a successor to undo. What follows is a graphic look at Yellen’s legacy.
From the first moment she took office, Yellen let it be known that labor market improvement was a high priority.
“The unemployment rate represents millions of individuals who are eager to work but struggling to provide for themselves and their families,” Yellen said at her March 5, 2014, swearing-in ceremony.
In her first major speech as chair a few weeks later, Yellen indicated she was going to look at a broader set of labor market indicators.
She mentioned workers in part-time jobs that wanted full-time work, the number of voluntary quits, low growth rates in compensation and the share of unemployed who hah been out of work six months or longer.
“The pre-crisis Fed was of the belief that the unemployment rate served as an excellent proxy for labor market activity,” said Rob Martin, U.S. economist at UBS and a former member of the Fed Board staff. “She is the one that said, ‘Just because the unemployment rate is falling doesn’t mean there still aren’t a lot of people who were pushed outside of the labor market,’” he added.
Even after broader measures of labor market slack began to fall, Yellen captained a strategy that kept rate hikes at a very slow pace.
A key element in the gradual rate hikes—there have been only four in her term, so far—was the chair’s intuition that lower rates of unemployment would pull in more labor supply.
“She was practically a lone voice,” said Andrew Levin, a Dartmouth College professor and former adviser to Yellen. “By contrast, other Fed officials never even mentioned the possibility that a lot of people might rejoin the labor force as the economy strengthened.”
Labor force participation was in decline as aging baby boomers retired. Yellen gambled that some of that decline was cyclical, due to people being marooned without the right skills or opportunities after the recession.
The hunch was vindicated. People who weren’t participating in the labor force started to come back.
Yellen came into office in a time of expansion and hasn’t presided over a recession. All three of her predecessors did. But the job had its challenges. The economy was in transition to a new pattern of growth, and monetary policy had to be rethought to fit it.