Donald Trump turned his rhetorical bazooka on Janet Yellen this week, accusing the Fed chair of being “highly political” and merely doing President Barack Obama’s bidding by declining to raise interest rates. In this as in so many things he says, Trump was issuing wisdom from his rear end, but the GOP candidate from clowntown did serve one useful purpose. He prompted us to ask yet again: What is Janet Yellen’s game?
Yellen is also taking fire from the left—specifically Ralph Nader, who also urged her to raise rates to help the “savers of America.” Nader threw in an oddly sexist bit of advice, counseling Yellen to “sit down with your Nobel Prize-winning husband, economist George Akerlof, who is known to be consumer-sensitive.”
If only things were as simple and binary (raise rates/don’t raise rates) as Trump and Nader make them seem. Very quietly, from her office in the Marriner Eccles building in downtown Washington, Yellen is acting out a very personal drama, one that reflects her entire professional career stretching back more than nearly four decades through academia to the San Francisco Fed to the White House Council of Economic Advisers. In doing so, she is taking the Federal Reserve yet again into uncharted territory, just as her predecessor Ben Bernanke did.
Yellen’s problem, basically, is this: Unemployment is statistically very low at about 5 percent, more than low enough to justify an increase in rates. In the past, as the labor market tightened (i.e. unemployment went down), wages and inflation began to rise. Today, that just isn’t happening. The Fed and its staff, like any good economists, rely on past patterns as a guide to future outcomes. And now, those patterns are no longer working: Wages are no longer following productivity upwards, and thus even many nominally employed people still feel poorer. At the same time, inflation appears all but nonexistent, despite many warnings to the contrary. So how can you justify raising rates?
Thus Yellen’s challenge—and, in truth, our collective challenge—is that the standards that are supposed to guide monetary policy appear to have collapsed.
What she is offering is something resembling the truth: it is looking increasingly unlikely that inflation, wages and labor markets are in a cyclical funk in the United States and increasingly likely that some fundamental structural shift has occurred. That shift, of lower cost goods, less velocity of money, lower wages, gig employment, the disruptions of technology, globalized capital markets, evaporating inflation, invalidates many of the bedrock assumptions of central banks. Yellen and many others are working furiously to understand and not to make missteps born of rigid and false theories.
Yellen knows perhaps better than most economists how much things have changed. Unlike some of the more conservative economists who have led the Fed, she sees unemployment as a social problem; the complexities of the labor market are her life’s work and passion, especially reducing chronically high long-term unemployment. Her mentor at Yale was the Nobel-winning liberal economist James Tobin, a Keynes acolyte, who schooled her in deep structural joblessness of the Depression, and the financial recklessness that led to it. Thus, when it comes to the Fed’s traditional “dual mandate” of both price stability and full employment, she seems very focused on the latter, transforming simple measures into a complex “dashboard” (as she calls it) of at least nine ways of looking at employment, including the job openings rate and the rate of layoffs.
Yellen also has a passion for reality, and for not pretending that the world is simple, two-dimensional, easy to gauge or ideological. Our problem today isn’t that she thinks this way; it’s that so few others in public life appear to do so. Her views, along with the deep and often wonky work of the Fed’s considerable staff of economists and statisticians and bankers, are as close to apolitical as you can get in government. She may be deeply mindful of her legacy, as her predecessors Alan Greenspan and Bernanke and a long line of others surely were; that only reinforces the intent to somehow get the big picture right and act accordingly.
And so, we are basically waiting for Janet Yellen to reinvent our understanding of the economy.
It’s possible she could do it. Today’s Fed has more powers and a broader mandate than the Fed that was created in 1913. Over time, its charter has been amended by Congress and its actions have been accorded greater weight by the markets. In addition to its dual mandate, it is now a lender-of-last-resort to banks. And with the dollar as the world’s de facto reserve currency, it must consider global financial risks and weaknesses as well.
To do that, it has at its disposal some basic tools–expanding or contracting the supply of money to affect short-term interest rates–and some unconventional ones such as the quantitative easing undertaken in the wake of the financial crisis.
And unlike Alan Greenspan, who seemed genuinely confused when the Fed began to raise rates in 2004 and global interest instead started to fall, Yellen clearly understands that the world has shifted in some fundamental way, even if she’s not entirely sure what it has shifted to.
One of the key questions the Fed faces is whether the present confusion is a cyclical phenomenon stemming from the aftermath of the financial crisis or a structural shift that means we are not going back to past norms. Said Yellen, addressing the annual Fed gathering at Jackson Hole last year, “What portion of the decline in labor force participation reflects structural shifts and what portion reflects cyclical weakness in the labor market?” She then acknowledged that the answer to her question was not simple: “ I expect … that our understanding of labor market developments and their potential implications … will remain far from perfect. As a consequence, monetary policy ultimately must be conducted in a pragmatic manner that relies not on any particular indicator or model, but instead reflects an ongoing assessment of a wide range of information … “
Juxtapose that statement, in all of its glorious, unequivocal uncertainty, with what passes for analysis among many of today’s political class. A recent editorial in The Hill blasted the Fed for fomenting a climate of uncertainty that was stultifying economic growth. That is only slightly better than Trump’s charge, and represents a widely held view that by forcefully stating the case of uncertainty and ambiguity, Yellen is not acting a truth teller but instead a cause of the current economic malaise. Some investors have charged that she has caused a “dazed and confused market.” How’s that for blaming the messenger?
Yellen will need all her passion for understanding the new economic direction we are in over the months ahead. She is facing relentless criticism not just from the likes of Trump and Nader, but from market mavens such as Carl Icahn and Stanley Druckenmiller who believe that the Fed under her aegis and that of Bernanke have created dangerous bubbles with zero interest rates and quantitative easing. That is an easy charge, and one which Yellen does not engage. She is too occupied trying to come to grips with a labor market and a financial system that just don’t make sense in terms of the familiar patterns of the 20th century.
Another fraught issue is whether the Fed can or should be using monetary tools to address structural issues in the labor market. The harm that the Fed can do to a fragile system is more immediately evident than any benefit that easy money can have on the hiring of more workers and the paying of current ones. When those patterns of tighter labor and then higher wages held, perhaps, but those patterns are nowhere evident today.
To which Yellen responds, “We just don’t know.” It’s said that the first step in any honest recovery is to admit what one can do and what one cannot. True, that is typically the mantra for recovery from substance abuse, but perhaps it has some traction for grappling with an economic recovery unlike any other. Yellen is the opposite of ego and certainty asserting itself, and that clearly confuses and angers many who want and demand that. Her message time and again is that she will not dictate monetary policy based on what people want the Fed to do or what rigid formulas may suggest. Her message time and again is that we live in an uncertain world with multiple variables and that any course of action must consider and game out multiple scenarios. And her message in the end is that there is so much we do not know about the world today, and that in the face of such uncertainty, caution and care are more important than decisive action for its own sake.
Media and political culture today, however, cannot digest those messages. The demand for simplicity and clarity communicated quickly rejects them, and hence tends to reject Yellen and the Fed culture today. What they want, she isn’t offering.
Could Yellen’s extreme caution in the face of uncertainty end badly? Of course it could. That does not mean it is the wrong approach, only that it carries its own risks. But faced with the blind, infantile cry for certainty, we should embrace Yellen’s passion for the real world rather than craving false answers that would do far more harm.
Zachary Karabell is head of global strategy at Envestnet and author of The Leading Indicators: A Short History of the Numbers That Rule Our World. He is a contributing editor at Politico Magazine.