Janet Yellen's Future at the Fed Unresolved Heading Into Jackson Hole

By Nick Timiraos Features Dow Jones Newswires

The prospect of a second term for Federal Reserve Chairwoman Janet Yellen won't be on the agenda at the central bank's annual retreat this week at Grand Teton National Park, but the question of whether she could be asked to stay on -- and whether she would accept -- will be hanging over the confab.

Continue Reading Below

Ms. Yellen hasn't said whether she would want a second term if it was offered. Still, some friends and former colleagues say her long record of public service and her devotion to the Fed are clues that she would be disposed to accept a nomination.

The Fed has outlined plans to slowly begin shrinking its $4.2 trillion holdings of mortgage and Treasury securities this fall and to raise rates one more time this year after that. Policy decisions beyond December are clouded by the succession question, and that uncertainty could increasingly weigh on markets, especially because President Donald Trump has indicated he is considering a wide range of potential candidates.

Ms. Yellen's term as chairwoman expires in early February. Mr. Trump has said he is considering asking her to serve a second term, though he may not announce his nominee until late this year.

Mr. Trump has said his economic policy director, Gary Cohn, is also in the running for the Fed job. The president has declined to name other possible candidates, but they are likely to fall into two camps -- conservative economists such as John Taylor of Stanford University, or nonacademics with a business background, such as Fed governor Jerome Powell or former Fed governor Kevin Warsh.

Ms. Yellen sidestepped questions about the matter when asked by lawmakers recently. "I really haven't had to give further thought at this point to this question," she said at a July congressional hearing. She declined an interview request for this article.

Continue Reading Below

People who know Ms. Yellen say even if she were ready to retire when her term as chairwoman ends, her long record of public service suggests she could be persuaded to stay. Given the additional turnover coming among top Fed officials, "it would be a leadership challenge like she'd never had before, but my own instinct -- whether she wanted to do it or not -- is she would," said Christina Romer, a friend of Ms. Yellen's and economics professor at the University of California, Berkeley.

Ms. Yellen has spent more than 16 years as a top Fed official during two stints -- a shorter one as a Fed governor before she headed President Bill Clinton's Council of Economic Advisers in the 1990s, and a longer one that began in 2004, when she became president of the Federal Reserve Bank of San Francisco. She served as the Fed's vice chairwoman before taking the top spot in 2014.

"It may sound naive, but my impression of what drives her is the mission, " said Robert Shiller, a Yale University economist who is friends with Ms. Yellen and her husband, George Akerlof, a Nobel laureate economist. "I don't know what decision she would make. Patriotism is a more important motive than people realize."

Many of her colleagues at the Fed and other central banks say her record managing a gradual withdrawal of the Fed's extraordinary postcrisis economic support while nudging the economy closer to its goals of maximum, sustainable employment and stable prices warrants a second term. The Fed has raised rates twice this year, after lifting them once in each of the prior two years.

Ms. Yellen also has guided Fed officials toward consensus on plans to reduce its portfolio -- so far without sparking the market upheaval triggered in 2013 when her predecessor, Ben Bernanke, signaled the Fed's intention to slow down bond purchases.

In recent weeks, Mr. Trump has boasted about a range of economic benchmarks, which helps explain why he would seriously consider asking Ms. Yellen to stay on. Stocks have hit new highs this summer despite the risk of less Fed-induced stimulus. The U.S. economy is growing slowly but steadily, and job growth has pushed the unemployment rate down to 4.3%.

Several political strategists, however, are skeptical Mr. Trump would pick Ms. Yellen because some Republicans might fume at her reappointment. Many GOP lawmakers opposed the Fed's campaign to keep interest rates low, in part because it lowered the costs of new debt amassed during the Obama administration, and they view Ms. Yellen as too closely wedded to postcrisis banking regulation. Ms. Yellen is set to speak about financial stability at Jackson Hole, Wyo., on Friday morning.

Some Trump administration officials believe the Fed kept interest rates too low for too long and took too heavy a hand to regulate financial institutions after the crisis.

During his campaign, Mr. Trump said he didn't plan to nominate her to a second term, in part because she wasn't a Republican. He accused her of keeping rates low to help Democrats, which she denied.

But Mr. Trump told The Wall Street Journal last month that he thinks Ms. Yellen has done well. "I like her. I like her demeanor," he said.

Every president since Ronald Reagan has asked the standing Fed leader to stay in the job at the start of his presidency. If Mr. Trump doesn't follow that pattern, Ms. Yellen would be just the third Fed leader since 1934 to serve only one term.

Some of Ms. Yellen's loudest critics recently have been those on the left who say the Fed has been too eager to raise rates. The central bankers' conference in Jackson Hole began last year with 11 top Fed officials defending their policies to activists from Fed Up, a campaign to urge policy makers to keep rates low. While the group is still critical of the Fed's rate increases, activists plan to return this year wearing Janet Yellen wigs at a Friday afternoon event urging her reappointment. "Even some of Janet Yellen's critics can see that it's the obvious choice," said Shawn Sebastian of the Center for Popular Democracy, a left-leaning group that organized the Fed Up campaign.

One complication for Mr. Trump's selection is that unlike other high-profile appointments, such as a Supreme Court justice, there isn't a ready-made list of experienced candidates with broad appeal to conservatives that also could reliably satisfy Mr. Trump's stated preference for low interest rates.

Given that preference, "Janet Yellen is the safest choice -- the most experienced, friendly, dovish policy maker he could appoint," said Vincent Reinhart, chief economist at Standish Mellon Asset Management and former head of the Fed's monetary affairs department.

If Ms. Yellen continued as Fed chief, she would be tasked with forging consensus with several other Trump appointees. Three of seven seats on the Washington-based board of governors sit vacant. Mr. Trump has nominated Randal Quarles, a private-equity executive who served in the Bush administrations, for one of the positions but has yet to name his other two picks. His nominations for all board slots, including the chair, are subject to Senate confirmation.

Ms. Yellen also faces the departure of key allies: Stanley Fischer's term as Fed vice chairman ends in June 2018, and New York Fed President William Dudley's term ends in early 2019.

Write to Nick Timiraos at nick.timiraos@wsj.com

(END) Dow Jones Newswires

August 24, 2017 05:44 ET (09:44 GMT)