What Yellen’s career tells us her views on fiscal policy

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Being the only game in town is not a role that the world’s monetary policymakers have always felt comfortable playing.

Central bankers are a quiet bunch, tending to prefer the boringness of the pre-crisis era to the limelight that’s shone on them for more than a decade now. So it is no surprise that in recent years this branch of financial officialdom has called — increasingly loudly — on their contemporaries in finance ministries to share the burden and unleash more fiscal stimulus to complement their ultra-low rates and bond-buying sprees.

During her time at the Federal Reserve Janet Yellen was among them, at times diplomatically warning that fiscal policies were needed to tackle deep-seated economic problems such as low productivity growth. Since leaving the Fed, Yellen has been more vocal. Via Bloomberg:

“While the pandemic is still seriously affecting the economy, we need to continue extraordinary fiscal support,” Yellen said in a Bloomberg TV interview Monday with Tom Keene and Lisa Abramowicz. “We need support for the economy from both monetary and fiscal policy. Monetary policy has already done a huge amount.”

Which suggests that she is unlikely to rein in government spending just yet. Nor will she come under pressure to after Senate seats in Georgia turn blue, handing the Democrats control of the upper house of Congress.

Yellen also has a record as an aggressive responder to financial crises. During her time at the San Francisco Federal Reserve, which she headed between 2004 until 2010, she was frequently the most dovish voice on the Federal Open Market Committee during the onset of the financial crisis. She even went as far as saying in 2010 that, if it were an option, she would vote for negative rates.

This was not something she backed after becoming Fed chair in 2014, however. And some have questioned the central bank’s decision to raise rates under her stewardship.

Beyond the near-term, we’re less sure that the Treasury Secretary will be as dovish on fiscal policy as she was on monetary policy during her years in California. Primarily because throughout her career, Yellen has warned that persistent US deficits would prove unsustainable as baby boomers retired.

Here are some remarks from 2017:

We do face, in terms of longer-term deficits as the population ages, an unsustainable debt path that will require, I believe, some adjustments to fiscal policy, and I hope Congress will keep that in mind.

And this, from the same year: (our emphasis)

It’s not that the debt-to-GDP ratio at the moment is extraordinarily or worrisomely high, but it’s also not very low. And it’s projected, as the population continues to age and the baby boomers retire, that ratio will continue to rise in an unsustainable fashion. So the addition to the debt, taking what is already a significant problem and making it worse, is — it is of concern to me, and I think it does suggest that in some future downturn, which, well, could occur just for whatever reason, the amount of fiscal space that would exist for fiscal policy to play an active role, it will be limited — may well be limited.

Towards the end of 2017, the US debt-to-GDP ratio was 102 per cent, today it stands at 127 per cent.

We doubt Yellen will cut spending immediately beyond the worst of the pandemic. The new Treasury Secretary cares about inequality and the gap between the precarious and the secure has widened substantially during the pandemic. Her priority in the coming year may well be — and indeed ought to be — thinking of ways to correct that. She also believes that there is little risk of inflation running rampant as a result of ballooning deficits as long as the Fed remains independent.

But our hunch is that, while fiscal policy will almost certainly pull far more of its weight under Yellen than it has in recent years, it is unlikely to fully replace central banks as the only game in town.

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