Next February, Janet Yellen’s first term as chair of the Federal Reserve will draw to a close, and the president will get to decide whether to keep the experienced technocrat in charge of the central bank.
At first glance, one might see little hope for Yellen’s staying power. After all, Yellen is admired by liberals, she is a woman, and she was an Obama appointee who owes exactly none of her professional success — and thus no personal loyalty — to Donald J. Trump.
But what dismays conservatives about Yellen has also endeared her to the president: her (relatively) dovish attitude toward curbing inflation.
The Federal Reserve has a dual mandate to promote full employment and keep prices stable. When economic growth is weak and inflation is low, the central bank (typically) keeps interest rates down, to encourage lending. When unemployment is low and inflation exceeds the Fed’s 2 percent target, the bank raises rates, so as to deliberately “cool” the economy.
After the 2008 crisis, the central bank kept interest rates near zero for seven years — and still struggled to hit its 2 percent inflation target. This demonstrable lack of an inflation problem was itself a problem for many powerful actors in our economy. If you’re a commercial banker, low-interest rates are a drag on profits. So, conservatives aligned with such interests have been wailing that runaway inflation is just around the corner — and thus, the Fed should preemptively raise rates — for nearly a decade now.
Liberals, by contrast, point to America’s declining labor-force-participation rate and weak wage growth, and argue that actively slowing down this lackluster economy — while inflation remains lower than the central bank’s (already modest) target — is lunacy.
But progressives aren’t the only ones who resent hawkish monetary policy — sitting presidents tend to feel the same. Short-term economic performance has a significant impact on an incumbent president’s chance of reelection. So Trump is not eager to have the Fed deliberately stymie economic growth over the course of his first term. And indeed, when asked about Yellen’s future in April, Trump said, “I do like a low-interest-rate policy, I must be honest with you.”
The trouble for Trump is that Yellen’s dovish attitude toward inflation is yoked to a hawkish position on financial regulation — as the Fed chair made clear Friday morning.
“The events of the crisis demanded action, needed reforms were implemented and these reforms have made the system safer,” Yellen said at the annual monetary policy conference in Jackson Hole, Wyoming. “Already, for some, memories of this experience may be fading — memories of just how costly the financial crisis was and why certain steps were taken in response.”
Yellen argued that, in the wake of the Dodd-Frank financial reforms, large banks shifted to a more stable mix of financing — relying more on equity investors, and less on risky, short-term borrowing — a development that has “boosted the resilience of the financial system.”
While the Fed chair acknowledged that heightened regulation may limit access to credit for borrowers with “less-than-perfect credit histories,” she contended that weakening regulations would increase the risk of another financial crisis, which would, in turn, make credit inaccessible for a far larger pool of people.
On the campaign trail, Trump vowed to dismantle Dodd-Frank’s reforms; as president, he has applauded the House GOP’s efforts to fulfill that promise.
The Trump administration’s leading advocate for loosening Wall Street’s leash — former Goldman Sachs president Gary Cohn — also happens to be under consideration as a possible Yellen replacement. Some have speculated that this opportunity may be part of why Cohn has agreed to remain in the administration, despite his disapproval of the president’s position on whether some white supremacists are “very fine people.”
Friday morning’s events may have boosted Cohn’s prospects of securing Yellen’s post — if the NEC director didn’t condemn neo-Nazis too harshly for Trump’s taste in his new interview with the Financial Times.