In her last press conference as Fed Chair, Janet Yellen showed no visible signs of emotion or resentfulness, taking her wholly unjustified dismissal with notable fortitude and good spirits. She even appeared relieved to step down, thus avoiding the inevitable clashes with Mr Trump, a sectarian President who is very prone to blunt abuse and economical with the truth. The mounting attacks on her policy line during the electoral campaign left no margin of doubt her days were numbered once the new White House tenant took office.
Her forced departure has prompted widespread recognition for her stewardship. Undoubtedly she managed the Fed with talent, composure and fairness. But any judgment on her record should focus on the way she conducted monetary policy. In this key area, Janet Yellen showed crititical shortcomings. Those who praise her tenure now seem to forget obvious blunders such as the reckless pledge to substantially increase interest rates last year. Failure to deliver this promise plunged financial markets into deep uncertainty and successive waves of discomfort and disarray.
She also missed the point when tackling inflationary expectations. After a quick recovery in the second half of last year, she seemed utterly baffled by the ensuing underperformance. In the press conference to close her mandate, she acknowledged that she had no clue to explain this phenomenon. A most worrying admission which prevented her from taking bolder steps to normalise monetary policy. The modest achievements in this field only materialised in a gradual scaling down of the massive balance sheet the Fed had built up by implementing its asset-buying programme.
Betting on a lower neutral natural rate to justify the limited scope for stiffer credit conditions provided a useful excuse for relative inaction. Yet such a stance has reduced the Fed’s ability to act should a downturn emerge. Coupled with the reduced scope of fiscal policy after the substantial tax overhaul due to take place, the US seems more vulnerable in the event growth perspectives might be derailed in future.
Mr Powell’s questionable credentials will contribute to boosting Ms Yellen’s standing. For all her weaknesses, both observers and markets will miss her unbiased attitude, conscientious dedication and economic mastery.