Breakingviews - Yellen may be bolder Treasury pick than she looks

Former Federal Reserve Chairman Janet Yellen speaks during a panel discussion at the American Economic Association/Allied Social Science Association (ASSA) 2019 meeting in Atlanta, Georgia, U.S., January 4, 2019. REUTERS/Christopher Aluka Berry

NEW YORK (Reuters Breakingviews) - In some ways, Janet Yellen is a safe choice as Treasury secretary. As former Federal Reserve chair, she has decades of experience in the U.S. financial establishment. Yet her ability to evolve means she could prove a surprisingly bold pick if circumstances require it.

If President-elect Joe Biden nominates Yellen, as the Wall Street Journal reported on Monday, she is likely to sail through the Senate confirmation process. While she ran the Fed, the U.S. unemployment rate fell around 2.5 percentage points, from over 6.5% in early 2014. She consistently defended the independence of the central bank, too. Even President Donald Trump, who replaced her with Jay Powell, wasn’t overly harsh on her.

True, Yellen’s traditional approach to policymaking led to some missteps. She has always been known as a dove, or someone who normally favors looser monetary policy to reduce unemployment, but did increase rates five times even though inflation remained low. The justification was that the economy had picked up and unemployment, around 5%, was low enough that inflation might start rising. Yet under Powell joblessness fell even further without generating significant price increases.

In that regard, the new Yellen looks different from the old one. Since standing down in 2018 she has been supportive of Powell’s aggressive policy actions, such as bringing rates near zero and setting up new lending facilities. Like the Fed itself, which recently modified its framework to no longer support hiking just because of a low jobless rate, she may be shifting her thoughts on how low unemployment can safely get.

Yellen also seems to have evolved on deficits. In 2017, she said that the trajectory of the country’s roughly $15 trillion debt burden, around 75% of GDP at the time, should “keep people awake at night.” Yet in January, before the pandemic really started, she had modified her stance, supporting increased spending for things like fighting climate change – and has supported spending more to fight this crisis.

So she may end up being more willing to support bold action. The only other former Fed chair to make the move to Treasury secretary was G. William Miller, appointed by then-President Jimmy Carter. Miller was pretty unsuccessful in both roles, partly because he failed to make drastic policy changes when they were needed. Yellen may have what it takes to rewrite that script.


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