With rate hike, Yellen places her firm stamp on Fed policy

Manila Bulletin, December 17, 2015

by Jeremy TORDJMAN

Washington, United States | AFP— It’s the most important decision of a long career.

In deciding to raise a key interest rate that has remained near zero for seven years, Federal Reserve Chair Janet Yellen has taken a risky step into unknown territory.
The 0.25 percentage point increase seems small but it marks a dramatic shift in US monetary policy and a huge decision for the 69-year-old Yellen, the first woman to preside over the US central bank and arguably the most powerful person in global finance.

Diminutive in size but a large force in the field of economics, Yellen, leading the Federal Open Market Committee in the move Wednesday, is pushing aside warnings from some of her most respected colleagues that it is too soon, and could snap back at her if the US economy slows next year.

But Yellen reiterated her belief Wednesday that the economy is solid and that not acting now risks inflation — currently minimal — getting out of hand.

“The first thing that Americans should realize is that the Fed’s decision today reflects our confidence in the US economy, that we believe we have seen substantial improvement in labor market conditions, and while things may be uneven across regions of the country, and different industrial sectors, we see an economy that is on a path of sustainable improvement,” she said.

The labor market specialist has long dealt with tough policy issues, but not from the driver’s seat.

In the 1990s she was a White House adviser to then-president Bill Clinton. In the 2000s she served as Ben Bernanke’s number two when he was Fed chair, before succeeding him in February 2014.

But Bernanke presided over the long period of the Fed trying to stimulate the economy back from recession, and Yellen’s challenge has been to break from that stance without doing damage.

Since she took the top Fed job, the key issuing confronting her has been raising the federal funds rate from the zero level.

It surfaced in every speech she made and at every press conference she held: at what point will the Fed consider the US economy strong enough to move away from the near-zero interest rate policy.

And she found that her every utterance, however seemingly innocuous, would send markets spinning, costing or gaining others billions of dollars.

But, reflecting her focus, she consistently reminded that there were still people desperately looking for work, and households struggling to get by, in arguing for sticking to the low-rate policy.

With her snow-white bob and throaty Brooklyn accent, Yellen is as prudent as any central banker. She repeats like a mantra that no shift in monetary policy is preordained: Everything depends on what the data shows on the economy.

And she fends off critics in Congress with a professorial calm, adjusting the small glasses on her nose, looking up at the attackers and explaining basic economic principles, comfortable that she knows far more than they do.

She fits squarely into the ranks of the Fed’s “doves” — those reticent to raise interest rates without a readily clear sign of inflation.

But her record is of a clear-eyed pragmatist not afraid of taking action. Fed records show that as the economy plunged into crisis in 2008, among policymakers she was sounding some of the direst warnings of a coming deep crisis. She was proven correct.

This time around, she was undoubtedly convinced to move by the fall in US unemployment to 5.0 percent, its lowest rate since early 2008, and concerns about potential overheating of the US economy under a flood of cheap dollars.

But she had to persuade a number of her colleagues on the policy-making Federal Open Market Committee worried about still-weak inflation and more willing to wait.

Prominent economists that she and her Nobel-prize winning husband, economist George Akerlof, know well, like Paul Krugman and Larry Summers, both publicly questioned the need to move before next year, when the US and global growth situation will be clearer.

The next challenge, they ask, could be what to do if the economy slips backward, an issue that would fall directly on her shoulders with certain admonishments from a legion of Fed-bashers.

“You won’t succeed all the time,” Yellen told students in a speech. “My Federal Reserve colleagues and I experienced this as we struggled to address a financial and economic crisis that threatened the global economy.”