US Federal Reserve: How should we judge Janet Yellen’s term as chair and what should we expect from her successor Jerome Powell?


Janet Yellen chaired her final meeting as boss of the US Federal Reserve, America’s powerful central bank, on Wednesday. She will formally hand over the job to Jerome Powell on Monday, when he is sworn in.

So how should we look back upon Yellen’s term as the head of the world’s most important monetary authority? And what should we expect from her successor?

How did Yellen do?

Yellen took over from Ben Bernanke in 2014, becoming the first female Fed chair. A highly respected academic economist, she fought off some heavyweight competition in the form of former Treasury Secretary, Larry Summers, to secure the job.

The US economy has performed extremely well over her period in charge, with GDP growth picking up and unemployment falling to its lowest levels since the Bill Clinton boom of the late 2000s.

She also oversaw the first interest rate hike in a decade, when the Fed raised its lending rate from 0.25-0.5 per cent in December 2015.

The markets had been careful primed to expect the monetary tightening and the financial sell-offs that many had feared did not materialise.

The Fed has gone on to raise rates a further four times, with the most recent coming in June 2017. A fifth is expected in March and the central bank is also gradually selling down its $4.5 trillion (£31 trillion) pile of assets, accumulated in the years after the global financial crisis to help support the US economy.

Some economists still believe that, with inflation so quiescent, the Fed and Yellen have been premature in raising rates. But even they credit her with being an extremely competent and level-headed Fed chair.

So why is she stepping down then?

Because Donald Trump chose not to reappoint her, even though most Fed chairs in recent history have served two terms.

Yellen is a Democrat, but previous presidents have happily reappointed chairs associated with the opposite party.

Trump toyed with appointing his chief economic advisor, Gary Cohn, a former deputy boss of the Wall Street banking giant Goldman Sachs. Another contender was a relatively young banker and former Fed official, Kevin Warsh, who has nothing like the stature of Yellen. Another name touted was John Taylor, a respected economist, but a noted monetary hawk.

But in the end Trump opted for 64-year-old Jerome Powell, a veteran private equity financier, registered Republican, and a member of the Fed board since 2011.

The assumption of many is that Trump simply could not bring himself to reappoint Yellen, who had been installed by his bête noire, Barack Obama.

And what should we expect from Powell?

Many Fed watchers breathed a sigh of relief when Powell was appointed.

He has much more experience than Warsh and is regarded as less compromised by links to Wall Street than Cohn.

Powell is regarded as a centrist on monetary tightening, meaning that he is seen as less likely to jack up rates rapidly, unlike Taylor.

Yet some are still worried about the possibility that Mr Powell might contribute to a dangerous deregulatory crusade being led by Cohn in the White House and supported by Republican congressmen who are heavily funded by Wall Street banks.

“We will continue to consider appropriate ways to ease regulatory burdens while preserving core reforms,” Powell said in his Congressional confirmation hearing.

Powell will be a significant player here, for good or ill, given the Fed’s formal responsibilities for financial regulation.

The former Governor of the Bank of England, Lord King, argues Powell’s biggest challenge will be protecting the independence of the Fed from likely political pressure from the Trump White House in the years ahead.

“The real test of [his] chairmanship will be to persuade Congress, and public opinion more widely, that delegating powers to the Fed … remains a vital public interest,” he wrote.

Furthermore, with many analysts worried that the US stock market is in the grip of a speculative bubble, and with recent Republican tax cuts set to stoke the US economy still further, Powell’s crisis-handling skills may also be tested sooner rather than later.

Given that what happens to the US economy and the dollar – the world’s reserve currency – matters hugely for the rest of the global economy, we all have an interest in Powell being up to the job.