Fundamental Comment

Janet Yellen was underrated, undervalued and will be missed

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It was a tough job but someone had to do it, and when asked to become the Fed chair by President Obama, Janet Yellen didn’t hesitate, officially taking up the office in October 2013. She inherited quite a storm, as did Obama’s administration from George Bush in 2008. It’s easy to forget that as Obama was inaugurated, the USA recession was caught in the eye of a bleak, recessionary, economic maelstrom. The Bush administration had created a chain effect that USA businesses and individuals are still feeling the effects of today.

With hindsight, the Bush administration had little choice other than to engage in its own fiscal stimulus including massive bailouts of banks, industries and private business. Politicians had to lean on the Fed in order to create the greatest, modern era, monetary stimulus program ever witnessed in the USA. Ultimately the fiscal and monetary stimulus has left the country with a Fed balance sheet of circa $4.2 trillion and USA Federal debt at circa $22 trillion, figures so massive, they’re difficult to rationalize and visualize, into a coherent context.

Critics of the Obama administration are quick to criticize the two time president’s administration of the economy. The main accusation is that the Q.E. asset purchase scheme was kept in place far too long. Similarly keeping interest rates so low for so long, can now look reckless, when observed in a rear view mirror, at the carnage the various banking crises had created. Critics are willfully ignoring the fact that the stimulation and easing, put in place by Bush had to be continued and was not Obama’s remit, it was principally the Fed’s. The country technically came out of recession in October 2009, but it took close on three years to return to significant growth. Arguably, the fiscal and monetary policies actually took until 2012 to begin to engender sustainable growth.

The Fed, through the stewardship of Janet Yellen (then recently appointed chair of The Fed), took the decision to finally end the six-year Q.E. program in October 2014. The Fed had added circa $3 trillion to its balance sheet, taking it to $4 trillion and it’s important to note that some three and a half years later it hasn’t figured out a method to quantitatively tighten and divest itself of this massive financial burden. It has to find a method to sell back the bonds to the banks/the market it bought from, in order to create liquidity and protect the solvency of certain institutions.

Janet Yellen not only oversaw the withdrawal of the Q.E. stimulus program, she also handled the USA economy being weaned off the other major stimulus of low interest rates. During her tenure the Fed closed out 2017 with rates beginning to approach a form of normalcy at 1.5%. Her calm stewardship and careful introduction of the interest rate rises, combined with the forward guidance delivered, ensured that the equity and bond markets avoided a shock. Her famous phrase, that the Fed quantitatively tightening its circa $4.2 trillion balance sheet would be “like watching paint dry”, assured investors that any selling off of the bonds and assets the central bank had bought, to allow investment and retail banks to create more liquidity, would cause as little impact as possible.

This considered approach, Mrs. Yellen’s ability to ensure no dramas were made out of crises and that any crisis was avoided, may be missed over the coming months and years. Many high level investors are already quietly asking the question; “would the selloff had happened under Yellen’s watch?” Would investors have thought consciously (or unconsciously); “no problem, Janet has got this”?

Trump was determined to get his own man in place and yet new Fed chair Jerome Powell was conspicuously absent during last week’s market selloff; a coincidence, or was it a lack of experience and confidence that caused him to stay in the shadows? Either way, many questioned whether a quick and simple statement from Powell would have gone some way to arrest the slide. We’ll gauge his impact over the coming months, however, the FOMC and Fed appeared united with regards to their support of Yellen’s monetary policy, the legacy of which will still be in operation. Powell can attempt to influence, but the key market operation decisions and the decisions on interest rates and stimulus, are taken by committee and not unilaterally by Powell or Trump. If that FOMC opinion becomes fractious and undivided, then Trump may live to regret not taking up Janet Yellen’s offer- to stay on for one more term as chair of the Fed.


Contributors: Analysts from Investopedia and FXCC have contributed in this post.

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