February 12, 2018 Reading Time: 2 minutes

On February 3rd, Janet Yellen concluded her four-year tenure as Chairwoman of the Federal Reserve. On the eve of her handing over the reins to newly confirmed Chairman Jerome Powell, Vice News Tonight ran a segment lauding Yellen as “one of the most effective” Fed chairs in history. The story featured an oft-cited quote by the Mercatus Center’s Scott Sumner praising Yellen’s performance: “Yellen is on a glide path to near perfection.”

Yellen’s success is hard to dispute using the Fed’s own criteria. The Fed’s dual mandate gives it two main policy objectives: maintaining full employment and achieving low and stable rates of inflation. In her four years at the helm, unemployment fell from 6.7 percent to 4.1 percent – slightly lower than most estimates of full employment. Inflation consistently hovered just below the Fed’s 2 percent target. With these results, it’s no surprise that President Trump’s decision not to reappoint Yellen has been met by many beltway pundits as a “tragedy.”

Yellen has certainly done an admirable job of hitting the Fed’s goals during her brief tenure. But that doesn’t necessarily mean that her tenure will be or should be considered a success.

First, let’s return to that Sumner quote. His full quote reads as follows: “Yellen is on a glide path to perfection, as she will probably end her term achieving the Fed’s dual mandate better than any other chair in history.” But, as Sumner has clarified more recently, “This does not mean that the Fed has the appropriate policy regime. That’s a completely different issue.” Sumner favors a nominal GDP level targeting regime. And, by that standard, Yellen’s performance  has been far from historic.

But there’s an even more fundamental critique of Yellen’s tenure. For all her short-term successes, Yellen’s Fed did very little to undo the damage of Bernanke’s Fed. And it did even less to put monetary policy on a sustainable long run path.

For years, Yellen promised a “normalization” of monetary policy, whereby the Fed would begin drawing down its QE-bloated balance sheet and return to relying on the federal funds rate as the primary instrument of monetary policy. Normalization was a risky prospect for the Fed. Sell off assets too fast and the fragile recovery might spiral back into a full-fledged financial crisis. So Yellen ultimately followed her predecessor’s lead and elected to kick the can down the road. The Fed’s normalization has crawled forward at a SNAIL’s pace. It’s balance sheet remains bloated, and it’s footprint on the amount of credit in the economy remains as deeply entrenched as ever. All this has served to bog down the private banking sector’s ability to spur sustainable economic growth.

None of this is to say that Yellen did a bad job. It’s too early to render a final grade. She has not yet earned an A. Much like her efforts to normalize, Yellen gets an incomplete.

Scott A. Burns

listpg_burns

Scott A. Burns is an assistant professor of economics at Southeastern Louisiana University. His research focuses on financial innovation in the developing world, including the mobile money revolution that has taken place in Sub-Saharan Africa. He has published scholarly articles in Constitutional Political Economy, Independent Review, and the Journal of Private Enterprise.

Burns earned his M.A. and Ph.D. in Economics from George Mason University and his B.A. in Economics from Louisiana State University.

Get notified of new articles from Scott A. Burns and AIER.