Yellen to make markets happy again

If Treasury Secretary Janet Yellen means
anything to business, labour and the world right now, it is as the avatar of the moral that luck is what happens when preparation meets opportunity.
Yellen, who was the only female chair of the 108-year-old Federal Reserve, has never done anything without exceptional due diligence. Her best-in-class career delivering financial stability bodes well as she manages the deeply depressed No. 1 economy rebounding from the largest contraction in gross domestic product since World War II and restores American prosperity.
It’s useful for investors and policy makers to keep Yellen’s record in mind
as questions arise — most
recently from Democratic economist and former Treasury Secretary Lawrence Summers — about the size of the Biden administration’s $1.9 trillion relief package and whether it risks overheating the economy. In the post-Trump era of polarising politics and mistrusted media, Yellen’s record of unflappable testimony will prove essential if Congress approves the stimulus.
Investors already know Yellen to be the epitome of assurance. In the $13 trillion market for government debt, the average volatility of US Treasury bonds declined 25% after Yellen succeeded Fed Chair Ben S Bernanke in 2014, and such price fluctuations were 30% lower than they were under Alan Greenspan, according to data compiled
by Bloomberg.
To be sure, Bernanke presided over the worst financial crisis since the 1930s. Greenspan’s 19 years leading the Fed, from 1987 to 2006, included Russia’s default, the Asian debt crisis and the dot-com
debacle at the turn of the century. He belatedly acknowledged his mistake in raising interest rates to chase non-existent inflation in the mid-1990s.
For her part, Yellen has proved consistently correct about policies designed to improve labour and capital alike, whether it’s raising minimum wages or protecting bondholders and shareholders. She was the first Fed official to publicly warn against the excesses of subprime mortgages in 2005 before the debacle exploded the credit markets in 2007.
As Fed vice chair, she helped discredit more than 20 esteemed economists and investors who assailed Bernanke — in a 2010 letter published in the Wall Street Journal — for his so-called quantitative easing policy and predicted a devalued dollar, plummeting bond prices and rampant inflation.
In fact, the economy and US financial assets appreciated with little inflation because Bernanke and Yellen and their colleagues said the Fed can always raise the
rate it pays on reserves — no matter how large the reserves — thereby modulating the rate of credit expansion.
This was a straightforward economics lesson that the critics of quantitative easing still haven’t acknowledged a decade later. The Fed’s QE policy helped bring the US out of the worst recession since the Great Depression and allowed the US to prosper to the point of being the only developed economy with record GDP by 2015, according to data compiled by Bloomberg. The Yellen-led Fed ended QE in October 2014 before the dollar, stocks and bonds traded serenely at their highs for the year.
Where the US is struggling, Yellen “brings together a deep understanding of monetary economics, financial markets and an understanding of labor markets,” said Joseph Stiglitz, the economics Nobelist, in a radio interview in 2013. Those skills were apparent last month during her testimony supporting major fiscal stimulus to help the economy recover from the pandemic. Yellen said “the world has changed” and “the future is likely to bring low interest rates for a long time.”

—Bloomberg