So what is it like to head the Federal Reserve board, often counted “the second most powerful job in the world” after the president’s?
“It was a job I loved,” said Janet L. Yellen, who was chair of the Federal Reserve System’s Board of Governors until February and who spoke at the University of Pennsylvania’s Wharton School on Monday, marking her first public appearance away from Washington since her departure. “There was a high degree of stress,” especially when explaining Fed deliberations to Congress and the public, she said, even with the “terrific” help of other Fed directors and the staff of the Fed, which is the largest employer of economists.
Yellen called herself “very impressed” with the intelligence and preparation of her successor, Jerome Powell, and his rapid efforts to educate himself about economic scholarship, even though he is not a Ph.D. economist. That degree wasn’t necessary “to understand economics and apply it,” she added.
Yellen said she has learned fast to appreciate the “freedom” of being a full-time scholar again, after four years in a security cocoon. After leaving her post, she was named a Distinguished Fellow at the Brookings Institution, a Washington think tank with a history of proposing government solutions to public problems.
Yellen took questions from Jeremy Siegel, the self-proclaimed “Wizard of Wharton”, who has taught at the Penn business school since the 1970s and promoted stocks as the best long-term investments in his book Stocks for the Long Run.
Employment is high, inflation is still low, but the former Fed chair said she’s concerned about slow growth in U.S. wages, worker productivity, and “business dynamism.”
She traced her intellectual roots to her early exposure to James Tobin, economic adviser to President John F. Kennedy, while she was an undergraduate at Brown. Yellen followed Tobin to Yale, where she did her doctoral studies. She said she agreed with the liberal Keynesian Tobin, the conservative monetarist Milton Friedman, and with Ben Bernanke, her predecessor as Fed chair, that the Fed had not done enough to restart the economy after the financial crisis of 1929, allowing the country to fall into the Great Depression.
The Fed’s policy of buying trillions of dollars worth of Treasury bonds and mortgage-backed securities during the late 2000s recession was a “direct application” of Tobin’s teaching that markets would not resolve crises such as high unemployment without government help “until we’re all dead,” she said.
Yellen said conventional wisdom among economists is that both conservative monetary theory and Tobin-style government activism can be applied to public policy. Long-term unemployment creates “social loss and human suffering,” and the government sometimes needs to step in to help put people back to work.
She said the financial crisis of the late 2000s showed that “financial supervision” of banks during the years when Alan Greenspan headed the Fed “was not what it should be.” She approved of the tighter banking rules that had followed earlier financial crises, and efforts to track investment banks, loan securitization, and other less-regulated financial forces that regulators long ignored.
Siegel didn’t ask about current congressional efforts to scale back the 2010 law tightening bank capital rules.
In the Q&A session, Yellen defended her decision, late in her term, to impose unusual restrictions on Wells Fargo & Co. after the bank was repeatedly censured for ripping off customers. “Wells Fargo agreed” to “unusual” limits on its growth, given the company’s large size and its “mismanagement,” she said.
Asked about the future of cryptocurrency, Yellen said “it is possible” that central banks will eventually make them available; several banks are studying proposals, including Sweden’s. But “it’s not obvious” that a national cryptocurrency would improve economic policymaking, she said.
Asked about the Trump administration’s new bid to tax imports of steel and aluminum, Yellen said they would likely have only “a tiny impact” on price inflation. “The larger concern” is a trade war and “more serious” retaliatory tariffs by other countries, she said. “All of us who have studied trade agree that removing trade barriers is beneficial” for most people, but hurts some. But “technological change” is more responsible for falling incomes and rising inequality, compared with trade.
Yellen said she was used to being one of the few women in economics long before she became one of the few to head a central bank. “My own experience has been very favorable,” she added, praising colleagues who mentored her, including her husband, George Akerlof, a Penn-trained economist, while noting that discrimination persists in the field. There are still relatively few senior economists who are women: “What the heck is going on there?”
Yellen became Fed chair, at a salary of around $200,000, in 2014, when the official U.S. unemployment rate stood at 6.7 percent. She left with the rate down at 4.1 percent, below the “natural” unemployment rate that some economists have projected.
She said the unemployment rate will keep dropping as long as the economy keeps creating close to 200,000 jobs a month, a pace she called “unsustainable,” leading possibly to an “overheating” economy and inflation and goading the Fed to boost interest rates faster.
Inflation has remained close to the Fed’s target of 2 percent, despite worries by Fed members that a drop in U.S. family size and foreign immigration may force wages higher, fueling price inflation.
Yellen said it’s all right if inflation rises a little above 2 percent, given lower levels in recent years.
Among her listeners was Patrick Harker, the former Wharton dean who is now president of the Federal Reserve Bank of Philadelphia. Harker said Trump had the right to replace Yellen, and Fed board members are looking forward to Trump’s appointments for four vacant seats.
Asked by Siegel whether stock prices have gotten too high, Yellen demurred. Stock and real estate prices are above historic levels, but cheap interest rates may account for part of that, she said.
“The financial system seems to be sound,” banks have piles of capital, bank regulatory agencies “have been strengthened,” and “risks are moderate,” for now, Yellen said. “The Fed should keep its eyes on” bank to make sure banks don’t get off track again, she said.