Market participants are going to be seeing quite a bit more of Janet Yellen for the foreseeable future.
Late in 2020, news of her nomination for Treasury lent a helping hand to calls for a year-end melt-up across markets.
The idea, generally speaking, is that she’ll facilitate the kind of fiscal-monetary partnerships seen as key not just to reviving growth in the post-pandemic world, but also to ameliorating socioeconomic strains.
That latter bit is ironic given the Fed’s role in perpetuating inequality, a situation they were effectively cornered into by a lackluster, post-financial crisis fiscal impulse. This is familiar territory in these pages. One of the most difficult points to convey to readers is the idea that it was not the Fed’s intention to foster gross inequality with monetary accommodation. Rather, they underestimated the efficiency of the transmission channel from accommodative policy to financial asset prices and overestimated the effect of the same policies on the real economy.
You could argue that underestimating monetary policy’s capacity to create excesses in financial markets is an unforgivable lapse. After all, there was plenty of historical precedent, if not for the sheer scope of the experiment in accommodation, then certainly for the Fed’s capacity to make or break markets. And even if there wasn’t any precedent, it doesn’t take a leap of logic to suggest that reducing the cost of money to zero and flooding the market with liquidity has the potential to create distortions.
Still, I’m continually frustrated (as much as I’m frustrated by anything, which isn’t much), by the endurance of conspiratorial narratives and patently ridiculous characterizations of technocrats and economists as nefarious cabals who are everywhere and always up to no good. That ghost story is inseparable from any number of other conspiracy theories, and it’s no coincidence that it’s perpetuated by the same web portals and the same people who traffic in similarly far-fetched tales. If you think Janet Yellen is nefarious, then I suspect you haven’t been around very many truly nefarious individuals in your lifetime.
In any event, the reality in 2021 is that Yellen is in a position to help ensure that her former colleagues at the Fed aren’t left to shoulder the entire burden of sustaining a recovery from a recession. Although Fed officials are loath to address the issue head on, they are, of course, aware that their policies, operating in isolation, drive up the prices of the assets most likely to be held by the wealthy, thereby exacerbating inequality. They’re also aware that dynamic may be close to a tipping point, beyond which the public won’t countenance it any longer.
So, let me put this in colloquial terms. As Treasury Secretary, Yellen will attempt to convince Congress to spend a bunch of money and otherwise move in the direction of directly addressing societal inequities. To the extent it’s possible, she’ll make it clear that the Fed will effectively finance that spending. This is so we don’t end up spending another decade mired in an increasingly precarious conjuncture wherein elected officials pretend they care about deficits and debt when it’s politically convenient for them, while outsourcing their responsibilities vis-à-vis the economy to an entity with insufficient tools to address the core problems.
On Sunday, Yellen explained some of this to CNN’s Jake Tapper, who asked her about comments from Larry Summers. Summers, you’ll recall, has variously argued against larger stimulus checks and made other suggestions that didn’t play well on social media (i.e., didn’t go over well with the general public).
“Summers suggested that [Joe Biden’s stimulus plan is] just too big — it would flood the economy with too much money and that could lead to rising inflation,” Tapper said. “Why is Summers wrong? Why are you confident this will not cause rising inflation?”
Yellen, exuding confidence (note the grin), essentially told Tapper she’s chief risk officer for the planet, at least as it relates to the economy and, indirectly, markets. “As Treasury Secretary, I have to worry about all of the risks,” she said. “The most important risk is that we leave workers and communities scarred by the pandemic, that we don’t do enough to address public health issues [and] that we don’t get our kids back to school.”
She wasn’t done. Yellen mentioned the familiar (and tragic) talking point that 10 million people who had a job this time last year don’t have one now, before noting that,
We need to make sure that children aren’t falling behind. We have way too many small businesses that are closing. 1.3 million first responders — policemen, firemen — have lost their jobs, and we need to get them back on the payroll. People are on the verge of losing the roofs over their heads. We have 24 million adults and 12 million children who are going hungry everyday. We need to provide them with food. We have people suffering — particularly low-wage workers and minorities — we have to get them to the other side and make sure this doesn’t take a permanent toll on their lives.
In essence, Yellen rattled off a list of every conceivable economic problem facing America and suggested that it all needs to be fixed — now.
“We need a package that’s big enough to address this full range of needs,” she added.
Obviously, the purpose of Yellen’s television cameos over the next several weeks will be to push Biden’s stimulus proposal. Her role is advocacy and public relations.
But, I don’t think it’s a stretch to suggest that Yellen’s tenure has the potential to be hugely consequential. She seems to understand that circumstances have given her a unique opportunity to cement a place in American history, broadly construed. Hers will be an ambitious tenure at Treasury.
Yellen seemed to brush Summers aside as though he were a nobody. She spoke for almost three minutes, uninterrupted, before she even addressed Tapper’s question about inflation. And when she did, she said this:
My predecessor — you know, he’s indicated that there’s a chance that this will cause inflation — that’s also a risk that we have to consider. I’ve spent many years studying inflation and worrying about inflation. And I can tell you that we have the tools to deal with that risk if it materializes.
Note the reference to “we.” The “tools” she’s referring to are rate hikes. The Fed hikes rates. Yellen is Treasury Secretary. So, who is “we”?