New York:
Since Janet L. Yellen became the Federal Reserve’s chairwoman in February 2014, unemployment in the US has steadily declined while inflation has remained low. Few Fed chairmen have achieved comparable success.
Yet President Donald Trump says he is still considering whether to nominate her for a second four-year term, and key White House aides are pressing for her to be replaced. Yellen’s peril reflects the polarisation of American politics. The three previous Fed chairs were reappointed at least once by a president of the opposite political party, but some Republicans are eager to oust Yellen, a registered Democrat who has strongly defended post-crisis financial regulations.
She may also become a victim of her own success. Steady economic growth and the tranquillity of financial markets have emboldened some critics, who see an opportune moment for a transition to new leadership. But Trump also faces warnings that replacing Yellen is an unnecessary risk to the economic growth the president has repeatedly pointed to as a primary success of his young administration.
“The economy is humming along,” said Julia Coronado, president of MacroPolicy Perspectives, a New York economic research firm. “The markets are humming along. Given all the other stuff that’s going on, why mess with that?”
Trump is considering four candidates to replace Yellen. On that shortlist: Gary D. Cohn, the president’s chief economic adviser; Jerome H. Powell, the only Republican on the Fed’s board of governors; John B. Taylor, a Stanford University economist who has criticised the Fed for raising interest rates too slowly; and Kevin Warsh, a former Fed governor and a fellow at the Hoover Institution.
“Honestly, I like them all,” Trump said. He added that he would choose a nominee “over the next very short period of time.”
The White House would like to make the nomination before he departs for a 12-day trip to Asia in early November. Yellen’s term ends in early February, and the next chairman must be confirmed by the Senate. Yellen, 71, has spent almost two decades at the Fed. She was a Fed governor in the mid-1990s, then returned to the Fed as president of the Federal Reserve Bank of San Francisco in 2004. She became vice-chairwoman in 2010 and chairwoman in 2014.
During her four-year term, the unemployment rate has fallen to 4.2 per cent while inflation has remained below 2 per cent. Both metrics are close to the levels the Fed regards as ideal. Indeed, it has seldom come closer.
She also has presided over the gradual reduction of the Fed’s stimulus campaign, which was implemented in the wake of the 2008 financial crisis, as the economy struggled through a bruising recession with persistent unemployment that peaked at 10 per cent in October 2009. Yellen’s calm and careful leadership style has won fans, both inside and outside of the Fed.
John Williams, president of the San Francisco Fed, said that Yellen had been effective in building a consensus about the direction of policy among Fed officials, and in communicating policy to the markets and the public. “When she came in there was a lot of concern about how would we unwind our policies and would that be disruptive and difficult, especially in the context of a global economy where other central banks were going in the other direction,” he said. “Now it’s almost like, ‘That was easy!’ But it wasn’t. It took hard work.”
Some of the other candidates, notably Taylor and Warsh, have argued the Fed should be raising interest rates more quickly. But financial regulation is the area in which a new chairman likely would make the largest changes.
The Fed supervises the US’s largest banks and oversees the broader financial system. Trump wants to loosen financial regulations, which he regards as an impediment to economic growth. Yellen, who played a key role implementing the new banking rules after the 2008 crisis, has acknowledged room for improvement.
But in a high-profile speech in August, she also issued a warning against going too far. The Treasury secretary, Steven Mnuchin, has argued that installing a new Fed chairman would help Trump achieve his goal of reducing regulation.
Charles W. Calomiris, a finance professor at Columbia University, said that Yellen’s approach to regulation was reason enough to replace her. “It’s not just that regulation is excessively costly and complex,” he said. “It’s also failing to achieve its objectives.”
But Yellen has faced relatively little public criticism. Trump criticised her on the campaign trail, but he has praised her since taking office. House Republicans have been among Yellen’s fiercest critics, regularly calling on her to increase interest rates and to reduce financial regulations.
Rep. Jeb Hensarling, chairman of the US House Financial Services Committee, sent a letter to Yellen in February demanding that the Fed stop crafting regulations until Trump appointed a new vice-chairman for supervision. Trump’s choice, Randal K. Quarles will oversee the Fed’s regulatory work, including its stress tests of large banks.
Even some of Yellen’s critics favour her reappointment. “She is an intelligent and level-headed individual,” said Deborah J. Lucas, an economics professor at MIT who has criticised the Fed’s bond purchases. “I trust her to make prudent decisions, particularly when it matters most, which is if there is another crisis. Continuity and experience seem especially valuable right now.”
Presidents in recent decades have generally decided to reappoint Fed chairmen, even from the opposing political party, on the theory that stability would comfort markets. Ronald Reagan, the last Republican president to inherit a Fed chairman who was a Democrat, thought seriously about replacing Paul A. Volcker in 1983, but ultimately decided to nominate Volcker to a second term.
“The financial market seems set on having him,” Reagan wrote in his diary. “I don’t want to shake their confidence in recovery.”
President Bill Clinton nominated Alan Greenspan in 1996 and in 2000 and President George W. Bush nominated Greenspan to a fifth term in 2004, before tapping Ben S. Bernanke to begin in 2006. President Barack Obama nominated Bernanke for a second term in 2010.
When Bernanke stepped down in 2014, Obama named Yellen. The last Fed chairman who did not serve a second term was G. William Miller, who is widely regarded as the least effective leader in the Fed’s modern history. Miller was also the last person without an economics degree to run the central bank. He was nominated by President Jimmy Carter in 1978.
Both unemployment and inflation were high and rising, and he was replaced after just 17 months by Volcker.
— New York Times News Service
