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Former Fed Chair Janet Yellen: Far from retired, nowhere near done
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Janet Yellen made history as the first woman to chair the Federal Reserve Board — a position that has been called “the second most powerful person in government” and the peak of a nearly 17-year career at the institution. As the president of the San Francisco Fed, she was one of the first to spot the decay in the housing market that was ultimately revealed to be at the root of the financial crisis. During her tenure, which received high marks from many economists, the economy grew and unemployment fell; she was also criticized for lackluster wage growth and not being as strong at politics as some previous Fed chairs. She has been described as a feminist hero and a “pop culture phenomenon.”
And while Yellen may have lost her job when President Trump declined to re-appoint her to a second term, the 72-year-old is nowhere close to retiring. She currently serves as a distinguished fellow in residence at the Brookings Institution and is the incoming president-elect of the American Economic Association.
The good news from her perch? “I think the economy is doing well,” she told Marketplace’s Kai Ryssdal during an interview conducted at her office in Brookings. But when asked about President Trump’s grasp of macroeconomic policy, Yellen was not so confident.
“I doubt that he would even be able to say that the Fed’s goals are maximum employment and price stability, which is the goals that Congress have assigned to the Fed,” she told Ryssdal. “He’s made comments about the Fed having an exchange rate objective in order to support his trade plans, or possibly targeting the U.S. balance of trade. And, you know, I think comments like that shows a lack of understanding of the impact of the Fed on the economy and appropriate policy goals.”
The following is an edited transcript of the conversation, which begins with Yellen explaining what she’s working on at Brookings.
Janet Yellen: Thinking about and working on issues pertaining to monetary policy strategy, you may know that the Fed is undertaking a review of its communications practices and asking questions and will be holding public meetings to think about medium-term monetary policy strategy. And I think that’s an important topic that I’ve been thinking about and doing a bit of writing on.
Kai Ryssdal: So you keep your hand in, as it were?
Yellen: I do. And I’m very interested in financial regulation and what’s happening in that domain as well.
Ryssdal: So we’re going to get all that stuff, but it occurs to me that it’s a mistake to call you retired.
Yellen: That’s probably fair. I’m pretty active. I’ve got a pretty busy schedule and I do a lot of speaking as well.
Ryssdal: What are you watching, big-picture wise?
Yellen: Well, I’m always watching the U.S. economy and where things are heading, and considering major shocks impacting where the economy is heading. I always think about Federal Reserve policy and watch it very closely.
Ryssdal: Do you talk to Chair Powell, every now and then?
Yellen: Occasionally I talk to Chair Powell, yes.
Ryssdal: It dawned on me when I was getting ready for this interview, doing a little research, you were at the Federal Reserve via your role as the president of the San Francisco Fed and then vice chair and chair. You were there for 14 years.
Yellen: Yeah. And I was a governor for a couple of years in the ‘90s, prior to that.
Ryssdal: Excellent point. You picked an interesting 14 years.
Yellen: That 14 years was very, very interesting, because I was out in San Francisco, and the San Francisco Fed covered nine western states, where much of the run-up in housing prices took place, where there was huge amounts of housing development, lending for construction and land development, and where subprime lending was really taking off. And I was out there during the time that that was going on. And then, of course, after the financial crisis.
Ryssdal: Do you think your time in San Francisco is one of the reasons you were among the first to spot the decay in the housing market and what was going on there?
Yellen: Yes, in that many of the, well, certainly the Bay Area, where I spent most of my time, there was an enormous run-up in house prices. But my area also included Southern California, the Inland Empire, where there was a tremendous run-up. We were watching what was happening through the Central Valley, Sacramento, Stockton, Merced, places in the Central Valley where there was enormous amount of construction, land development. Las Vegas, Nevada, was in my region. I visited Las Vegas frequently. Arizona, there was a huge run-up in housing in Phoenix. And so all of these places that were at the heart of — you know, there were other places too, of course, in the south, it wasn’t only the west — but these were places that were very hot and I had, you know, I met with many business contacts during those years. I had boards of directors. We had four branches in addition to our San Francisco Board. So I met with a lot of people in housing and real estate and banking and saw what was happening.
Ryssdal: Bring it forward now, then, here we sit in 2019, a little bit more than 10 years past the worst of the crisis. How was, I suppose, this economy changed by the crisis? I mean, you have said you, as a central banker, were shaped by the crisis. Talk to me about the economy in this crisis.
Yellen: Well, the economy is different now. And, you know, we suffered a very long period of having a depressed economy and labor market because of the damage from the crisis. And we’ve now gotten down debt burdens, they’ve been gradually worked down. We had a household sector that in the run-up to the crisis was highly leveraged, was really spending a great deal based on borrowed money. And that’s changed substantially now. Debt burdens in the household sector are way down, both because of what’s happened with mortgage lending, but also because of a low-interest-rate environment. And we do have solid spending, consumer spending in the U.S. economy, and it’s not based on a housing bubble or unsustainable borrowing.
Ryssdal: But as long as we’re on consumers, I’m sure you saw that report out from the New York Fed a week-ish ago, whatever it was, about millions of people being delinquent on their car loans. And I wonder if maybe consumers are being asked to bear a little bit much of the burden in this economy right now?
Yellen: Well, you know, consumers have seen some gains in real income, but —
Ryssdal: Yeah, but tiny, right?
Yellen: — they’re modest, and lending was very restrictive in the years following the crisis. And in recent years some areas like auto lending, credit card lending, obviously student debt, have opened up. The standards have become less tight. And my sense is that the increase in delinquencies partly reflects the fact that credit standards have become somewhat less tight.
Ryssdal: On that theme, then, where do you see downside risk?
Yellen: Well, so I think that households remain in good shape. But I’m concerned about investment spending. We’ve not seen any meaningful pick up, that I can see because of —
Ryssdal: By businesses, right?
Yellen: By businesses, because of the tax package. And I think some of the uncertainties about trade policy are beginning to stifle investment spending. So I’m concerned there. We’ve had a big fiscal impetus that resulted in very strong growth last year.
Ryssdal: The tax plan, right, the tax cuts?
Yellen: The tax plan, and there were big spending increases as well, discretionary spending for defense and nondefense. That impetus is beginning to die out and could, you know, could turn to restrictive in another year. The global economy —
Ryssdal: Let’s break that down. Restrictive in another year means what?
Yellen: Well, it means it could be a drag on growth. Currently, it’s a small positive for growth. It could become a drag on growth. The global economy last year was firing on all cylinders. And now we are seeing weakness in key places, particularly China, and the European outlook is worrisome as well. We’re seeing less growth in Europe than I would have expected.
So the global economy looks to be weakening, and financial conditions have tightened overall. The Fed wanted to see them tighten. They raised interest rates in order to tighten them. For a long time, the stock market was rising so much and long-term yields were coming down. There wasn’t really any meaningful tightening of financial conditions. But then things turned, and now financial conditions are tighter, and that will have some depressing effect on spending too.
Ryssdal: Without asking you to comment directly on what Chair Powell is doing. because I know you won’t, I wonder whether things would have been similar at the Fed had you been re-appointed? Would the path of monetary policy have been similar?
Yellen: I think the path of policy would have been broadly similar. We have a strongly recovering economy, and the Fed for many years had its foot solidly pressed to the — pedal to the metal.
Ryssdal: And other phrases that you never thought you’d hear Janet Yellen say.
Yellen: Giving it lots of gas. I always talked about we were on a path to normalize the stance of policy, to make it less stimulative as the economy recovered, and the Fed has continued on that path.
Now, you know, we also had a huge fiscal stimulus that came at a time when the economy was arguably operating near full employment. Really didn’t need that stimulus. And I think it was appropriate to tighten financial conditions some to make sure that inflation didn’t heat up. We don’t want a stop-go economy where later on the Fed would be forced to tighten and cause a downturn.
So the Fed behaved preemptively in moving toward a neutral stance and now I think they’re at a position, especially with the weakening in the global outlook and the tightening in financial conditions, where there are a lot of uncertainties clouding the outlook, and it’s appropriate to stop and watch how things develop.
I have to say that the inflation outlook is just very benign. We have really tight labor markets and inflation is barely 2 percent.
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Ryssdal: And you have famously said — I’m paraphrasing here — “I don’t know what’s going on with inflation.” Right? I mean, you’re smiling.
Yellen: A little more extreme than I probably would have put it myself.
Ryssdal: But you said you can’t figure it out, right?
Yellen: There’s less inflationary pressure than I would have expected in a labor market this tight. You know, many people have never experienced high inflation who were around today. I lived through the ‘70s when inflation was very high and the Fed didn’t really do much about it for a long time when it bubbled up.
I think many people now believe inflation will run around 2 percent and they’re not terribly worried about high inflation, and I think that the Fed’s trustworthy. The Fed’s amassed a very good record since, certainly the early ‘90s. Inflation has barely averaged 2 percent since the mid-90s. And so inflation expectations are very well contained, and we — just the linkages between the labor market and inflation seem to be very weak.
Of course, if the labor market continues to tighten a lot more there’s upside inflationary risk. The Fed may need to tighten policy again. But right now inflation is barely running at 2 percent after six or seven years of under 2 percent. And it’s hard to feel strong inflationary pressures building from any data or conversations with businesses.
Ryssdal: This is a little bit sideways, but you mentioned the ‘70s and the inflation in the ‘70s and early ‘80s. I was talking to Neel Kashkari, now the president of the Minneapolis Fed, a number of months ago and he said he thinks the Fed today and its caution on inflation is shaped, was shaped, by Chair Volcker and and what happened back in the ‘70s and ‘80s.
Yellen: Well, nobody wants to repeat that type of experience. Those were devastating times for the U.S. economy, and you’re supposed to learn from bad experiences. And I think I did and many of the people who are sitting around the FOMC table.
But on the other hand, you should learn from past experience but not make the assumption that the economy is stagnant and things don’t change. And I like the fact that the Fed is open to considering whether or not things have changed and is not prematurely shutting down this expansion based on a presumption that inflation will pick up. It was preemptive in raising rates from zero up to a more neutral stance, and I do think that was appropriate. But they’re keeping a very open mind about the inflation outlook, prepared to go in either direction with policy and not just assuming — remembering the lessons of the ‘70s, but not automatically assuming it’s about to repeat itself.
Ryssdal: You mentioned the trustworthiness of the Fed and its track record, which gets me to the American public having confidence in the Federal Reserve. You and Chair Bernanke and Chairman Greenspan and everybody at the Fed works really hard on that. I have to ask you, then, about some of the remarks by the president of the United States about Chair Powell and what the Federal Reserve is doing and, in his mind, the impact that it’s having.
Yellen: Well, I don’t think it’s had a tremendous impact yet, and it would distress me if I thought it were having a significant impact. I think the economy is doing well. The Fed is very close to having satisfied its maximum employment and price stability mandates and you can see that most people feel good about the economy and the Fed.
But it would concern me — President Trump’s comments about Chair Powell and about the Fed do concern me, because if that becomes concerted, I think it does have the impact, especially if conditions in the U.S. for any reason were to deteriorate, it could undermine confidence in the Fed. And I think that that would be a bad thing.
Ryssdal: Do you think the president has a grasp of macroeconomic policy?
Yellen: No, I do not.
Ryssdal: Tell me more.
Yellen: Well, I doubt that he would even be able to say that the Fed’s goals are maximum employment and price stability, which is the goals that Congress have assigned to the Fed. He’s made comments about the Fed having an exchange rate objective in order to support his trade plans, or possibly targeting the U.S. balance of trade. And, you know, I think comments like that shows a lack of understanding of the impact of the Fed on the economy, and appropriate policy goals.
Ryssdal: More broadly, then, his understanding of the effect of his trade tariffs and his withdrawal from, say, the Trans-Pacific Partnership.
Yellen: Well, I think that’s creating a lot of uncertainty for businesses, and I think my own view is that those shifts are likely to be adverse for the U.S. economy, to the extent that some of these things are bargaining chips, with the hope of lowering trade barriers generally. I suppose the outcome of that, if it’s successful, could be positive …
Ryssdal: It’s a big “if.”
Yellen: It is as a big “if.” And when I continually hear focus by the president and some of his advisers on remedying bilateral trade deficits with other trade partners, I think almost any economist would tell you that there’s no real meaning to bilateral trade deficits, and it’s not an appropriate objective of policy.
Ryssdal: And the president, of course, China specifically, focuses on that quite a bit.
Yellen: He has focused on that quite a bit, especially with respect to China.
Ryssdal: This is kind of a shot-in-the-dark question, but what would it take for you to pick up the phone and call Kevin Hassett at the Council of Economic Advisers? Or Larry Kudlow at the National Economic Council, and say “Hey, Lar?”
Yellen: Well, that’s something that I have not done since leaving the administration. I had regular contact with the Council of Economic Advisers and the NEC, as well as Treasury, while I was at the Fed, and I’m sure that Chair Powell and others continue to do so. I haven’t picked up the phone.
Ryssdal: Do you miss the Fed?
Yellen: I think the Fed is a terrific organization. I really feel it was a privilege and an honor to have had a chance to serve there and I think, as you know, I would have been perfectly pleased to serve another term. Of course, that was clearly up to President Trump to decide. I have a lot of confidence in my successor. I feel he’s well-equipped and doing a very good job. But I certainly miss the Fed. I very much enjoyed my time there, and the work that it does, and the people I worked with.
Ryssdal: I want to turn for a second, and, by way of preface, I have to point out the obvious, which is that you were, for a number of years, the most powerful economist in the world, and you’re a woman, and the first woman to be the chair of the Fed. But I want to ask about the economics profession and women. As you know, [there was] a lot of press after the American Economic Association meeting this past January about the role of women in your profession. It’s difficult, if not malign, for a lot of women in your profession today. You’re in a position of power, next year, as the president of the AEA. What can you do about it? What are you gonna do about it?
Yellen: I believe it needs to be a very high priority for the American Economic Association to address this. I will say that the current president, the president this year, is Ben Bernanke, my predecessor …
Ryssdal: Is that, like, the gig? You leave the Federal Reserve and you become the president of the AEA, is that what happens? Come to Brookings, and then AEA?
Yellen: Well, it has for the two of us. So I will succeed him, year after next. But I’m working closely with him. The AEA has done a survey of members of the profession to try to better assess the climate and the issues that women and minorities face in the profession. Those results will be available in the not too distant future, and I think the AEA will take very meaningful steps to address the problems that exist for women and minorities in economics.
Ryssdal: But when you go back to, let’s say, Yale, where you got your Ph.D., to give a talk, or meet the students, or whatever, and a young female economist comes up to you and says: “How’s it going to be for me out there?” What do you tell her?
Yellen: Well, it is not a terrible environment for most women. It is a terrible environment for some women, and that really needs to change. But, I mean, if you ask me about my own experience as a woman in the profession, you know, being in a small minority has had some impacts, but I’ve had a great career, found many mentors and had, you know, a successful time in the profession. And I think that’s true for many women. So there are problems, but it would be going too far to say that it’s impossible to have a rewarding career in economics if you’re a woman. There are too few women in the profession, and there are some aspects of the way the profession works that I think hold women back and are hostile. But lots of women succeed and it’s a rewarding profession.
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Ryssdal: I want to circle back to the work you’re doing here at Brookings, on the Federal Reserve and communication. You’re the person who gets a lot of the credit, from Chair Bernanke, actually, for pushing him to be more communicative and more open. You continued that in your service as chair, and Chair Powell has extended that, has gone further, as well. So what do you think of that?
Yellen: I think it’s the right thing to do.
Ryssdal: How come?
Yellen: I think, you know, there are two reasons. One, is as an institution with a great deal of power and influence and independence, with a big effect on the economy, it’s utterly essential that the Fed be accountable to Congress and the American public, and explain what it’s doing and why. If they change interest rates and raise interest rates, people have a right to know what was it that motivated that decision, and what effects will it have on the economy. Legitimacy and democratic accountability, I think, is crucial, but also it’s a tool of policy. What the Fed says about what it’s doing, and how it sees the economy and plans to conduct policy in the future, shapes market expectations about the likely path of economic activity, and inflation, and interest rates. And that has an impact in its own right on the economy. So communication is, in its own right, a policy tool.
Ryssdal: What’s the most important thing people don’t understand about the Fed?
Yellen: Well, that’s a hard question. Many people don’t really understand the objectives of monetary policy, and that’s one reason that Chair Bernanke and I push to have an explicit statement of what the FOMC’s [Federal Open Market Committee] longer-run goals and objectives are, that we try to articulate that 2 percent inflation is what we would like to achieve, on average, for the economy, that inflation can be too high, and we would act against it, and also too low, and to explain how the maximum employment mandate fits in, and if there are conflicts, which doesn’t occur very often but can occur sometimes, how those conflicts would be managed. I think, importantly, one of the most distressing things to me was during the financial crisis, when the Fed intervened using its discount window, particularly, in order to stop what could have been a Great Depression and a complete financial meltdown. All too many Americans thought the Fed is doing this because they care about Wall Street, and they want to make sure people on Wall Street don’t lose a lot of money, and nothing could have been further from the truth. The Fed was doing that so that the flow of credit to businesses and households didn’t dry up. It could have been, if that had happened, that unemployment could have hit Great Depression levels. And so it really is important that the public see the Fed as an institution that cares about Main Street.
Ryssdal: But you get why people were so upset during the crisis.
Yellen: Absolutely, I do.
Ryssdal: As Timothy Geithner said on this program, the gut instinct is to let it all burn down.
Yellen: Yes. And people were really mad at what financial institutions, and what happened in Wall Street, and they’re right to be mad. I’m mad, too. And it was very distasteful to have to do some of the things that prevented failures on Wall Street. I think Chair Bernanke has said that rescuing AIG was one of the most distasteful things that he ever had to do. I mean, here was a completely irresponsible firm that had taken actions that put the whole U.S. economy at risk. And the natural desire is to want to punish that … wrongdoing, let’s call it. And everyone in the Fed felt exactly the same way that all Americans do. But we didn’t want to end up punishing the American people by allowing a financial crash that would have cost even more people their jobs than the large number who lost them.
Ryssdal: So there are signs of softness in the American and global economy. I wonder, though, and, you know, you’re the person who famously said “economic expansions don’t die of old age.” But do you think by looking for, or looking at, the weaknesses, we are bringing a recession upon ourselves?
Yellen: Well, financial conditions have tightened and the stock market has dropped, in part because of concerns about downside risks and the possibility of recession, and financial conditions do matter to the actual outlook, so that linkage is there, that fear that there will be a recession can trigger changes, could bring one on. But I think the reassuring words from the Fed that it is not locked into some predetermined course, that it’s watching the economy very carefully and will address risks whether they require interest rate increases or cuts, and that it’s in a period of watchful waiting, I think that that is helpful in reassuring market participants. So, there is some risk of a recession. But, again, I’d say I don’t think that, as you said, I don’t think expansions die of old age. You know, we had a period of remarkable growth in 2018, probably around 3 percent. That just isn’t sustainable.
Ryssdal: It’s so funny that you say 3 percent is remarkable growth because that, for years, was the norm.
Yellen: That was the norm, but we’re in a world of both slow labor force growth and low productivity growth, and probably a sustainable pace of growth in the U.S. economy is around two [percent], or possibly even a little under. Almost all economists anticipated that the U.S. economy would slow toward that trend this year. Much of the evidence that concerns people suggests yes, that slowing is in train, but it doesn’t suggest a recession, an actual downturn in the economy. And I don’t believe we will have a recession this year, but of course it is a risk.
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