The Legacy of Janet Yellen
Janet Yellen took over as Fed Chair in February 2014 at which point she had already been with the Fed for a decade. Although no new financial crises occurred during her term, the job at hand was no less tricky. Yellen inherited the responsibility of reversing the quantitative easing (QE) program shortly after her predecessor, Ben Bernanke announced to taper it.
To put it simply, the QE program was used to combat the 2008 financial crisis. It injected liquidity into markets by buying debt securities. Effectively, the supply of money increased, and the cost of borrowing fell rates to near zero levels. Low interest rates were meant to stimulate economic growth. However, they had associated costs. Firstly, surplus liquidity could trigger inflation. Next, citizens were earning less from their investments. Lastly, there was a risk of another asset bubble building up, leading to a new crisis.
During her term, Yellen employed a cautious, planned, and calculated approach. Her focus was on bringing unemployment down. She avoided rash interest rate hikes by understanding that surplus liquidity would not result in runaway inflation. Rate hikes were conducted in a phased manner and the economy was prepared for each one. There has been a certain finesse and sense of judgment to these decisions.
It is often believed that a longer tenure would allow central bankers to act in the long-term interests of the economy. Yet, in her single term, Janet Yellen has managed to bring down unemployment to a 17-year low, keep inflation below 2% and economic growth at 3%. This shows promise of continued progress. Her successor, Jerome Powell, is likely to follow a similar approach, even if he entered at the start of a market correction.