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Janet Yellen at Treasury Points to Era of Fed Control

·6 min read

(Bloomberg Opinion) -- Janet Yellen is poised to become the most economically powerful woman in the world. Again.

Bloomberg News described her in exactly that way in October 2013, when President Barack Obama nominated her to succeed Ben S. Bernanke as Federal Reserve chair, a role she would hold for four years during two administrations. This time, Yellen is President-elect Joe Biden’s pick to serve as the next Treasury secretary.

It’s a smart and historic pick for any number of reasons. For one, she’s poised to be the first person ever to have been chair of the White House Council of Economic Advisers, Fed chair and Treasury secretary. She also stands to be the first woman to lead the Treasury, breaking yet another barrier in economics as she has time and again throughout her distinguished career.

Yellen’s previous experience also suggests that the Biden administration wants a Treasury that works hand in glove with the Fed to bring the U.S. economy back to where it was before the coronavirus pandemic. The president-elect’s decision to bring in a highly regarded central banker upon taking office — and amid an economic crisis — echoes Obama’s move to name Timothy Geithner, the president of the New York Fed at the time, as his first Treasury secretary in 2009.

A more pessimistic view is that the plan to nominate Yellen could be taken as an early signal that Biden doesn’t expect much cooperation on his economic agenda from what could be a Republican-controlled Senate.

Recall that Yellen, 74, was the Fed’s vice chair from 2010 to 2014, then took over as chair from Bernanke until she was succeeded by Jerome Powell in 2018. That means she was either the No. 1 or No. 2 decision-maker at the central bank during the entire period of Obama’s presidency in which there was a divided government. From 2011 through 2015, even during a relatively tepid economic recovery, the U.S. budget deficit narrowed each year, forcing the central bank to carry the weight of the world’s largest economy on its shoulders, engage in novel asset-purchase programs and hold off on normalizing interest rates for far longer than policy makers anticipated.

This time around, the entirety of Fed leadership has been outspoken during the Covid-19 pandemic about the need for additional fiscal stimulus to prop up the economy as virus outbreaks intensify across the country. Yet Congress has stalled for months, first ahead of the election and now as President Donald Trump refuses to concede. Yellen called fiscal relief “essential” last week during the Bloomberg New Economy Forum, while Powell reiterated earlier this month that “continued support from both monetary and fiscal policy” will be needed to get the U.S. back to levels of activity and employment from the start of the year.

Powell and Yellen have a long history of working together, and if any economic leaders can usher in an era of sustained monetary and fiscal policy coordination, it’s the two of them. Part of the reason Powell was nominated to serve another term on the Fed, after initially being appointed in 2012 to fill an unexpired governor term ending Jan. 31, 2014, was to provide at least some continuity during the transition from Bernanke to Yellen. During Powell’s first year as Fed chair, he directly followed in Yellen’s footsteps with quarterly interest rate increases of 25 basis points. There’s little question that they’re on the same page.

Some Fed observers have criticized the two for raising interest rates too quickly during their respective stints as heads of the central bank, given the lack of sustained inflation pressure. Both Powell and Yellen have adjusted their thinking on the relationship between employment and inflation, which is now codified in the Fed’s new monetary policy framework, and they’ve become been much more outspoken on the need to keep fiscal policy accommodative after an economic downturn until a recovery is well underway.

Biden hinted that his pick for Treasury secretary would be a person acceptable across the Democratic Party. Progressives are on board with Yellen because she endorses the idea of taxing carbon emissions to fight climate change. Biden had said that he would consider creating a special White House office led by a climate “czar” to coordinate efforts to fight global warming, including potentially giving multiple agencies like Treasury a role. On Monday, the transition team announced former Secretary of State John Kerry would be that climate czar.

Yellen was selected over other highly qualified candidates, including current Fed governor Lael Brainard, retiring TIAA Chief Executive Officer Roger Ferguson, who was Fed vice chair from 1999 to 2006, and Sarah Bloom Raskin, a former Fed governor and deputy Treasury secretary. Bloomberg News reported Monday that Brainard, the only Democrat on a Fed board filled mostly by Trump appointees, was told by allies of Biden to stay at the central bank, possibly because they see her as a leading candidate for Fed chair when Powell’s term expires in 2022.

In the meantime, a Fed-Treasury team of Powell and Yellen should function seamlessly, in contrast to the rare public spat last week between Powell and Steven Mnuchin over letting certain Fed emergency lending programs expire at the end of the year. Both of them have credibility across party lines, so expect a united front on additional congressional action.

Still, it’s hard not to be skeptical of elected officials passing another sweeping stimulus package after watching the last few months of haggling, even if the two top U.S. economic officials are pounding the table in unison for it. Dow Jones, which first reported the selection, said transition officials viewed Yellen as “someone who could collaborate closely with the Fed and executive-branch agencies to engineer more support if Congress remains hesitant to act.”

At least if the Fed has to do much of the heavy lifting, it’ll have a familiar face at Treasury doing what she can to lighten the load. Less than three years after the end of her term at the central bank, Yellen is back in charge.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

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