This was followed by a December 5, 2010, appearance on 60 Minutes. Chairman Bernanke defended the Federal Reserve’s controversial bond-buying program as necessary to help the economy and, by extension, help lift employment. Moreover, he explained the importance of trying to foster inflation, because “we’re getting awfully close to the range where prices would actually start falling.”
At the time, much of the criticism focused on the potential of quantitative easing leading to strong inflation. In fact, gold sales were rising as popular commentary suggested that gold would serve as a sound hedge to inflation. Bernanke countered on the show that the fear of inflation was overstated. “We’ve analyzed it every which way,” he said. “One myth that’s out there is that what we’re doing is printing money. We’re not printing money.” He added that the Fed could raise rates “in 15 minutes if we have to.”
In 2012, under Bernanke’s guidance, the Fed approved 2 percent as an inflation target, a target it has yet to achieve as the FOMC met in March 2018. While credit is given to Bernanke for keeping the economy out of the kind of downturn that ravaged the U.S. during the Great Depression, he’s been criticized for keeping rates too low, for too long. The policy forced pension funds, insurance companies and individual investors to take on undue risk in order to meet obligations. Moreover, worries persist on how the Fed will ultimately unwind its $4.5 trillion balance sheet and normalize interest rates.
Janet Yellen – The Path Towards Normalization
Chair Janet Yellen (2014 – 2018), the vice chair under Ben Bernanke, paved the way for a more transparent Federal Reserve. Labeled a “dove” by analysts, Yellen had outlined a plan to raise rates four times in 2015, yet because of a litany of concerns, there was only one rate hike in December, the first hike since 2006. The “too low, for too long” criticism intensified as a result.
A labor economist by training, Yellen maintained that the low-rate policy was necessary because “slow progress in moving the economy back toward full employment will not only impose immense costs on American families and the economy at large, but may also do permanent damage to the labor market.” As the labor market added more jobs and the economy gained traction, she surprised analysts as she laid the path towards normalization with a steady pace of rate hikes. Her signature “patient and gradual” approach towards a higher interest rate environment helped assure stock market investors that the rate-hike cycle would be well telegraphed before each move by the FOMC. Yellen’s style was to keep markets informed and to make certain there weren’t any surprises.
Janet Yellen left the Federal Reserve with the unemployment rate falling to a healthy 4.1 percent during her tenure, and low-wage workers are beginning to see higher wages. This was accomplished before the promise of fiscal help from the tax cut plan.
Ironically, Chair Yellen was applauded by many Republicans for doing a difficult job under difficult conditions, and many wanted her to stay on. Politico quoted Scott Sumner of the conservative Mercatus Center as saying, “Yellen is on a glide path to near perfection, as she will probably end her term achieving the Fed’s dual mandate better than any other chair in history.”
Jerome Powell – Pragmatist at the Helm
Chairman Powell enters the second quarter with two important market “tests” behind him. The first, in February, was the Semiannual Monetary Policy Report to the Congress, and the second, the FOMC meeting in late March, in which the committee raised rates as it continues the path toward rate normalization.
A lawyer by training but with enough tenure immersed in monetary philosophy, Chairman Powell will make decisions based on the broad swath of evidence. Powell emerged as a pragmatist, willing to examine the data without embracing the loftier language of an academic economist’s theoretical models and somewhat esoteric explanations. He is to the point, confident in tone and comfortable in his delivery.
His message was clear: with inflation moving closer to the Fed’s 2 percent target and employment gaining strength, the path towards normalization may need a faster pace. “The economic outlook has strengthened,” Powell said. “Headwinds have turned into tailwinds.” Accordingly, as the economy gains traction a higher-rate path is appropriate, but Powell reiterated that the path will be “gradual,” the word most closely associated with Yellen.