Global Perspectives: Janet Yellen on Becoming an Economist, Being Fed Chair and Views on Fed Independence
Janet Yellen holds a unique place in Federal Reserve history. In addition to being the first woman to lead the institution and chair the Federal Open Market Committee (2014 to 2018), she is also the only person to have served as a Federal Reserve bank president (at the Federal Reserve Bank of San Francisco, from 2004 to 2010), Fed Governor (from 1994 to 1997) and Vice Chair (from 2010 to 2014). It all began with a year as a humble Fed staff economist from 1977 to 1978.
One of Yellen’s predecessors as Chair—William McChesney Martin—famously defined the role of the central banker as being analogous to that of the chaperone who orders the punch bowl removed just as the party is warming up. Central bankers have a well-worn playbook for how to do that.
Yellen’s great accomplishment as Chair of the FOMC was more challenging: beginning the process of normalization following the extraordinary series of actions that the FOMC took to stabilize the U.S. economy in the aftermath of the global financial crisis a decade ago and preventing a second Great Depression.
There was no playbook for this process, which was more akin to removing training wheels from a still-wobbly bicycle. The fact that things went so well and that her successor as Chair, Jerome Powell, inherited an economy with low inflation and low and declining unemployment, is testament to her leadership.
Earlier this month, the Federal Reserve Bank of Dallas hosted Yellen—currently a distinguished fellow in residence with the Economic Studies Program at the Brookings Institution—as part of the Bank’s Global Perspectives speaker series. This series was launched at the beginning of 2016 with the objective of bringing leaders from the worlds of business, academia and policymaking to the Dallas Fed to share their insights on global, national and regional developments.
Yellen and Dallas Fed President Rob Kaplan discussed her decision to become an economist, her experience as Fed Chair and the importance of Fed independence. The following are excerpts from their conversation, edited for clarity, and presented by topic.
On Becoming an Economist:
Yellen: I decided to become an economist during my freshman year as an undergraduate. I always liked math and science, and I went off to college with the thought I might be a math major. But I was fortunate to take economics during my first year at Brown [University], and that was love at first sight.
I never looked back. I knew that was the right thing for me because what really attracted me to economics was the logical, analytical, rigorous way that economists think about issues and look to the empirical data. It is also about things that are fundamental to human welfare: opportunity, the ability to support one’s family and to achieve one’s goals, to have a secure retirement, and to see one’s children advance and do well.
Lessons of the Great Depression:
I also early on took a course in macroeconomics, where I studied the Great Depression. I was keen to understand what economists knew about what had happened, because it was such a prolonged period of intense suffering and joblessness. I realized that economists felt they had tools that could be used to address that.
I guess that tied in with my own upbringing. My parents were college students during the Great Depression, and it did influence their lives. They talked to me about joblessness and what they had seen during the Great Depression. My father was [later] a family doctor and he took care of lots of working-class people who suffered from the ups and downs of the economy. His office was in our home. And I heard very often when I was growing up about what it meant to family life if someone lost a job.
So, this was always an interest of mine from early on. I never expected that we would have an episode that had the potential to be as serious as the Great Depression. But when that happened back in 2008 after the financial crisis, this was in some sense the culmination for me of what had interested me in economics in the first place.
Serving as Fed Chair:
Everybody who serves in leadership roles at the Fed feels the obligation to establish a set of values for the organization and to motivate the people in the organization. What is it that we’re doing? Why is it important? What are the core values of our organization? Those are things I felt very strongly about as Chair.
I wanted people to understand what we’re about as an organization—that our job is to make sure that we have a financial and economic system that works to promote the well-being of Americans. And all the work that we do, whether it’s in banking supervision or financial stability, the payment system, community development, monetary policy or IT (information technology), it all ties in with those important goals.
We are an organization devoted to public service; we are professional. And we make decisions based on facts and evidence and analysis. We stay out of politics. Nothing we do is political.
Chairing the FOMC is a key responsibility. The chair of anything helps set the agenda, prepares meetings and works with the staff to make sure that the information and analysis is available to the committee members to enable productive discussions and to make sure that decision-making is orderly and collegial.
Developing, Communicating Fed Policy:
I felt a core responsibility of the Chair is to try to find consensus about policy. I think the strength of the FOMC is that there are many different opinions around the table—people coming from different backgrounds with different perspectives who make different contributions. Falling into groupthink is a danger for any organization. So, it’s very worthwhile to have a range of views around the table. But at the end of the day, for an organization to succeed, you need to bring people together behind a strategy and decisions in a way that can be communicated to the public.
I saw that as a core responsibility and then communicating what is policy and what is the rationale for policy to the public. Whether it’s in speeches or press conferences or congressional testimonies, I felt like that is another core responsibility of the Chair. And to make as clear as possible to the public what the values are that motivate this organization. Why are we doing the things that we’re doing?
Fed independence is very important. It’s not goal independence; the Fed’s goals are set and established by Congress. To me, independence means that the Fed should have the ability to use its tools to decide the best way to achieve those goals, and that’s something that should not involve politics and Congress should not be able to overrule.
Those decisions should be made by a committee (the FOMC, which is governed by a congressional mandate) that makes its decisions based on the best technical analysis, judgment, information and analysis of risks in a completely nonpolitical way. And I believe that’s exactly what the Fed does. I strongly support it, and there’s a large body of research that shows that in countries with independent central banks, macroeconomic performance is better.
The Fed’s Inflation Target:
The Fed’s inflation target is 2 percent. Of course, it’s a symmetric target—sometimes it’s below and sometimes it’s above. That’s normal and to be expected. The problem is that we've had six to seven years in which inflation is running under 2 percent.
Recently, inflation has been quite close to 2 percent; core inflation (excluding food and energy) over the last 12 months has been running about 1.8 percent, but it’s pretty close to 2 percent. So, to my mind, inflation has moved up.
It’s important that the Fed achieve this 2 percent inflation target. Some people seem to think the Fed is targeting inflation under 2 percent, that 2 percent is the ceiling rather than the target. That is not the Fed’s view; that is a dangerous view. It’s a view that if it were widely held would probably lead inflation expectations to dip down over time, which would be very worrisome in a low-inflation environment. Right now, I see the economy operating at basically full employment with core inflation awfully close to 2 percent.
There’s no notion in the current strategy statement that if there’s been a long period in which inflation has undershot 2 percent, that there would then be an attempt to compensate for that by allowing inflation above 2 percent.
Rethinking the 2 Percent Inflation Goal:
Symmetry means, of course, sometimes we’re above, sometimes we’re below—and an undershoot is just as significant and worrisome as an overshoot. In that sense, the losses are symmetric. But it could be that the current system has problems, and it might be beneficial to rethink whether or not the current system is ideal. [It might be worthwhile] to consider a system more like one in which if there were a long undershoot then, yes, there might be a conscious attempt to want to let inflation run a little above 2 percent for a time so that at least, loosely, inflation averages 2 percent.
Let me just indicate why I personally think this is very much worth considering. We seem as though we’re in a world where interest rates are likely to stay low. Most economists believe that the general level of interest rates is going to be lower in the future than it has been for most of the postwar period.
That means that there’s not that much room to cut interest rates if there’s a negative shock to the economy. You’re going to find some shocks lowering interest rates to zero and the Fed then having to consider unconventional policy. And in those episodes, with a weak economy, inflation is likely to fall below 2 percent.
Now, if in other times, when the economy is completely normal and the Fed can achieve on average its inflation target, in those times, the Fed achieves 2 percent on average. But then there are also significant times when inflation is under 2 percent.
Market participants are going to say to themselves, ‘What inflation rate should I expect, over, say, the next decade?’ Well, some of that decade will have times when inflation averages 2 percent and then there’ll be the zero-bound periods when it falls under 2 percent. That doesn’t seem like the 2 percent average; that seems like a less-than-2-percent average.
And if that’s the case, if inflation expectations [subsequently] fall, the average inflation rate will fall, and that’s a dangerous situation, because then the average level of interest rates will fall even more than it already has. This is a problem I think Japan has suffered, and we don’t want that to happen here.
About the Author
Mark A. Wynne
Wynne is vice president and associate director of research in the Research Department at the Federal Reserve Bank of Dallas.
The views expressed are those of the author and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System.