Janet Yellen, the Federal Reserve chair, begins her final rate-setting meeting at the helm of the US central bank on Tuesday, before she is replaced by Donald Trump’s chosen successor, Jerome Powell.
The first woman to lead the Fed arrived in February 2014 at a time when the money-printing machine of quantitative easing was whirring at full-tilt under her predecessor, Ben Bernanke. QE, which involved the Fed buying bonds from financial institutions, pumped billions of dollars into the US economy to keep it afloat after the financial crisis.
Yellen leaves next month with a legacy as the Fed chair who began the long process of turning off the QE machine, and for raising interest rates for the first time in seven years in 2015.
Powell will have a tough act to follow, with the stock market currently sitting at a record high and as economic growth continues to strengthen and unemployment stands at the lowest level since 2000.
No increase in interest rates is expected this month, although further hikes are forecast for later this year. James Knightley, senior economist at ING Bank, said: “She has followed up [Bernanke] with strong leadership and solid decision making that led to the robust economic performance we see today. Given all these successes, Jay Powell has been set a very tough bar to match.”
Here are five achievements that will define her legacy:
Yellen leaves the Fed having hit a key economic target given to the central bank by Congress, of attaining maximum employment. Under Yellen, the unemployment rate has fallen by more than a third over the past four years.
The jobless rate has dropped from 6.7% at the start of her tenure to stand at 4.1% last month – the lowest level since the year 2000.
With the long-run normal rate of unemployment reckoned to be about 4.6% by the Fed, the conditions for hiking interest rates are there. But Powell will need to tread carefully to satisfy Trump, whose jobs-focused rhetoric was vital in helping him become president.
Slow and steady inflation
Yellen also passes the second test set by Congress: to keep inflation within a slow and steady range, having kept the rise in prices hovering close to its 2% target.
Although the consumer price index flirted with deflation in 2015 close to the start of her tenure, prices have gradually picked up in recent years without spiralling out of control.
But Yellen has also had to wrestle over a conundrum as well, and one which will be inherited by Powell, as growth in workers’ pay remains strangely absent despite the lowest levels of unemployment since 2000. The Fed needs to be sure wage inflation is on its way before raising interest rates further.
Yellen began reducing the Fed’s $4.5tn (£3.2tn) stockpile of bonds last year, with praise from investors for the way she signposted the central bank’s gradual winding down of the unprecedented stimulus package. By contrast her predecessor, Ben Bernanke, who introduced QE amid the credit crunch, sent markets into a spin in 2013 when he first aired the prospect.
Under Yellen, the Fed has now raised interest rates from zero and has started to wind down bond purchases under QE. This will give the bank leeway to tackle any future economic shocks by turning the QE taps back on, or lowering interest rates once more.
Safer financial system
Yellen helped to oversee the introduction of new rules designed to make the US banks safer after the financial crisis, known as the Dodd Frank reforms, after Wall Street institutions came close to toppling in the 2008 crash.
Trump would like to see these controls weakened to boost lending. But Yellen has proven a strong advocate for keeping them, arguing they have not unduly restricted access to finance for businesses and households. Her stance was one of the reasons why Trump didn’t back her for a second term.
The markets might miss her
Stock markets have roared ahead under Yellen, with the Dow Jones Industrial Average up by more than 70% during her four years in charge. While that is some way behind another predecessor, Alan Greenspan, who oversaw a four-fold increase in the Dow from the late 1980s to 2006, it is an impressive run. nonetheless.
The use of “forward guidance” by Yellen and other Fed chairs involved sending very clear signals about the timing and pace of monetary policy changes – it was adopted by central bank governors the world over, from Mark Carney at the Bank of England to Mario Draghi at the European Central Bank. It has proved vital for investors looking to gauge how monetary policy might develop. As a consequence, it helped to keep volatility low in markets and pave the way for big share price gains.
Yellen’s successor is not an economist, but a lawyer, and investors will be watching closely for any hints about how he intends to steer monetary policy. If he fails to telegraph the Fed’s policies as well as Yellen, that could unsettle investors.
“Yellen was a steady pair of hands,” said Trevor Greetham of the City investment firm Royal London.
Powell has a tough act to follow.