In January, we had a post entitled “The Yellen Era?” where we discussed how Yellen might herald a new approach to Fed policy. For those watching the Fed so far, they might not detect any change. Quantitative easing, initiated by Ben Bernanke, has been maintained although lightened to the current $35 billion per month. Financial markets have benefitted most from this policy, and while unemployment in the US has declined and growth has picked up, the labor-force participation rate (at 62.9%) remains disappointing and the long-term outlook for the economy lackluster.
In an interview with the New Yorker published on July 21, 2014, Janet Yellen acknowledged that the short-term objective of the Fed after the financial crisis was to avoid immediate disaster. This was also discussed by Timothy Geithner in his book, Stress Tests: Reflections on Financial Crises, writing that bankers were “collateral beneficiaries” of the government’s bail-out of banks, designed to prevent a financial calamity from crushing the economy. Now that the balance sheets of US banks have been restored, how can Main Street be revived? What happens in the US is important as it points to what may happen elsewhere.
Yellen reaffirmed her passion for Main Street and talked about her mission “to help bring to an end, once and for all, a dark period in economics that began decades before the financial crisis” to one more concerned with employment and to “core aspects of human well-being” which is what she believes economics should be about. As a student of Tobin, she is passionate about social justice and public policy. In discussing financial markets, she acknowledged that they are not always efficient. This is indeed a departure from the blind faith in investor rationality that prevailed prior to the financial collapse. In a quiet way, without causing waves, is Yellen gradually paving the way for, in her words, “public policy…[and] our social obligation…to make the world a better place”?
Many are watching the Fed…and Janet Yellen, the most liberal Fed Chair since Mariner Eccles of the Roosevelt administration, to see how she may live out her commitment to improve the economy for ordinary people, not just market players.