When Janet Yellen took over as Chairwoman of the Federal Reserve on February 3rd, 2014, the unemployment rate in the U.S. stood at 6.7% and inflation was a comfortable 2.0%. The U.S. economy was steadily recovering from the worst recession since the Great Depression, and Chairman Ben Bernanke’s controversial second term was quickly coming to an end.
Nominated by then-President Barack Obama in October of 2013, Yellen, the former Vice Chairwoman of the Fed and San Francisco Fed President, underwent months of politically-charged criticisms from the Republican majority in Congress, before being approved by the slimmest margin in Fed chair voting history at her confirmation hearing. Congressional Republicans, mostly including those with Presidential aspirations or other personal projects in mind, lined up to produce campaign-style soundbites questioning her qualifications or ability to lead the Fed unbiasedly. Senator Marco Rubio of Florida, for instance, declared that he “will be voting against her nomination to chair the Fed because of her role as a lead architect in authoring monetary policies that threaten the short and long-term prospects of strong economic growth and job creation,” while Sen. Ted Cruz of Texas blamed her for the economy being stuck “in malaise” and denigrated the Fed for “printing money by the billions” and risking an inflationary spike that would decimate a fragile Main Street.
Now, over four years later, even conservative commentators such as Scott Sumner of George Mason University’s Mercatus Center cannot deny the positive impact she’s had on the Fed, as well as the broader U.S. economy, throughout her tenure. In his blog “The Money Illusion,” he writes that “Yellen is on a glide path to near perfection, as she will probably end her term achieving the Fed’s dual mandate better than any chair in history.” Indeed, it would be tough to picture the economy in better shape than it is after four years with Yellen at the helm. Unemployment in December of 2017 came in at 4.1 percent, with inflation settled in at just under 2%. These positive trends are expected to continue into 2018.
Now, with the U.S. economy humming along in its expansionary phase and growing outputs as fast as any other in the developed world, it seems obvious that Yellen would be asked to stay on board for another four-year term as Chairwoman. Like many affairs in the Trump era, however, the chairmanship of the Federal Reserve has been unduly politicized and logically handicapped at the expense of the American voter. After achieving the Fed’s “dual mandate” better than any Chair in history, Yellen is now being pushed aside by President Trump in favor of Jerome Powell, a political ally and current member of the Federal Open Market Committee, the body charged with setting monetary policy in the U.S.
While President Trump technically has the right to appoint whomever he wants to lead the Federal Reserve, relieving the most successful chair in Fed history after one term will certainly raise some eyebrows. It also makes the Fed’s most successful chairwoman the first appointee to not receive a return offer from the President since G. William Miller in 1981, whose two-year term sent the economy into almost immediate recession from 1980-1982 before he was replaced less than two years into his appointment. Critics argue that it’s part of a larger trend of President Trump refusing to re-appoint Obama-era nominees, such as Preet Bharara (the former U.S. attorney for the Southern District of New York) and Sally Yates (the former Deputy Attorney General in the Justice Department), while others chalk it up to the President’s desire to leave his own unique legacy by appointing non-conventional nominees to top positions.
This departure defies conventional logic in two primary ways. For one, Powell is far less qualified to serve as Fed chair than Yellen was, even at the beginning of her term. After revisiting the public and private sectors throughout his career, Powell, a career Republican, was nominated by President Obama to the Federal Reserve’s Board of Governors mainly because he was one of few officials who would criticize his party’s stance on the debt ceiling debate. Moreover, his time on the Board of Governors has been, at best, inconsequential, and, at worst, downright disruptive. In his book “The Courage to Act,” former Chairman Ben Bernanke basically blames Powell for the 2013 “taper tantrum,” in which a hint that the Fed’s policy of “quantitative easing” would soon be finished sent markets around the world tumbling (this claim is corroborated in a blog post by former Minneapolis Fed President Narayana Kocherlakota). The most encouraging aspect of his candidacy ahead of its January confirmation vote was Powell’s tacit admission that he would continue most of Yellen’s policies as chairman.
Even worse than the reckless appointment of a less-qualified candidate, however, and the second way in which this decision defies reason, is the shamelessness with which Republicans now take credit for the policies Yellen promoted, which they took turns publicly denigrating less than 5 years ago.
The policy that many Republicans took issue with, known as “quantitative easing,” was actually started by Bernanke, a Bush-era appointee. This process involved the systematic printing of U.S. currency in order to buy back Treasury bonds and mortgage-backed securities, which was meant to put further downward pressure on borrowing costs and thereby encourage private investment. This policy has been criticized for artificially boosting asset prices around the world without guaranteeing any underlying economic growth. Now, however, as this July 2017 piece in The Street argues, those critics have largely been proven wrong. Stock indices have in fact been consistently reaching new all-time highs, but unemployment is also near cyclical lows and inflation has been steadily coming in just beneath the Fed’s 2 percent target, a near-perfect outcome for the average American consumer. Even Yellen’s harshest critics have had trouble poking holes in the strongest U.S. economy in decades.
Now, Yellen must sit back as President Trump, who called the unemployment rate “fake” during the 2016 campaign and routinely criticized the Fed’s easy monetary policy, touts the success of her policies as his own while simultaneously kicking her to the curb for a less-qualified candidate. There is perhaps no better microcosm of the Trump political apparatus than this. Moreover, it exposes the blatant hypocrisy with which the modern Republican Party approaches the American political arena.
President Trump, whose inability to understand basic economic data can be deduced by his inexplicable claim that the real unemployment rate is closer to 42 percent at a campaign rally in 2016, has been touted as a business genius by the Republican Party throughout his campaign and tenure as President, despite multiple bankruptcies and his refusal to release his tax returns that would reveal his true net worth. Now, his long-revered capitalist instincts will be put to the test as he goes out on a limb by nominating Powell to replace one of the Fed’s most popular leaders.
As our current expansionary phase of the economic cycle begins to come to an end and volatility reasserts itself in the markets, Congressional Republicans, and even President Trump himself, may soon be yearning for a return to the easy-money landscape of the Yellen era.