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Next Monday, February 5th will see Jay Powell take over at the Federal Reserve, becoming the 16th chair of the Board of Governors. This of course means that the incumbent chair, Janet Yellen will oversee her final meeting today.
Powell is expected to be a moderate leader with a similarly cautious approach like his predecessor. He is seen as a ‘consensus builder’ and was a unifyingfigure during his time as a Fed governor; for example he has never dissented from a central bank decision. But how will Yellen be judged in the history books once her time has passed?
If we look at the Federal Reserve’s “Dual Mandate“, this is stated as a mandate from Congress to “promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates”. So, regarding the first goal, let’s remember that when Yellen took over in 2014, more than 3.8m more people were unemployed and the jobless rate was at 6.7%. Fast forward to 2018 and this rate has now fallen to a 17-year low of 4.1%, a drop of more than a third in four years.
The second objective of slow and steady inflation has been achieved by Yellen although 2015 did see CPI figures drop below 0% for a period. Since then, prices have risen to around 2% and yet, Yellen has had to face that current central bank conundrum of weak wage growth with very strong jobs data.
Finally, Yellen has undertaken the gradual and sequential exit from years of unconventional monetary policy. Her unprecedented unwinding of QE has not derailed the markets nor economic growth. The Fed raised interest rates for the first time in seven years in 2015 and this year is on track to raise rates three times.
The Fed’s Dual Mandate objectives over the Yellen years
As stock markets have boomed and we’ve seen the broadest global recovery in 10 years, so Janet Yellen leaves her post with the US economy seemingly in a good place. Balancing low inflation with possible overheating in financial markets will be the puzzle for Powell to solve. The shift from the disinflation of last year to an economy with a spring in its step cannot be disputed. As a well-known market commentator said earlier this week, Yellen has engineered an ongoing ‘beautiful normalisation’.
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