By Alan S. Blinder, Vice Chairman and Co-Founder, Promontory Interfinancial Network
Professor of Economics and Public Affairs, Princeton University
The Yellen era at the Federal Reserve effectively came to a close on Wednesday, when the Federal Open Market Committee issued its last statement bearing her imprimatur. Since the statement said basically nothing new, her chairmanship ended not with a bang, but a whimper. But that’s not a criticism.
While I’m a big believer in central bank communication, sometimes there is nothing to communicate. In truth, the Committee had raised rates at its last meeting, planning at the time to wait until March for the next rate hike; and nothing happened to upset that plan. The economy has been boringly tranquil—and so, appropriately, is the Fed. On top of that, the two dovish dissenters from December 2017 lost their votes in 2018. So the boring statement was unanimously agreed.
As we look back at the Yellen era, what do we see?
First and foremost, we see expert steering of the national economy into a position better than probably anyone dreamed possible four years ago: a 4.1% unemployment rate and an inflation rate that, while it remains below the Fed’s 2% target, seems to be perking up a bit. Given the Fed’s dual mandate, that’s pretty close to hitting the bull’s eye.
Second, under Yellen’s skilled leadership, the Fed managed the transition from the super-expansionary monetary policies left behind by Ben Bernanke to modestly contractionary policies (higher interest rates and a shrinking balance sheet) with barely a hiccup in either the economy or the markets. At least so far, the Fed’s long-feared “exit” has been smooth as silk.
Third, and mostly unnoticed except by true aficionados, she engineered several adjustments in the Fed’s communications that could have been difficult, but that she made look easy. For example, do you remember when markets expected the Fed to start raising interest rates as soon as the unemployment rate dropped below 6.5%? (I didn’t think so.)
Janet Yellen leaves a legacy to be proud of. She also leaves Jerome Powell a clear blueprint for finishing the job. We all wish him good luck.
