Yellen's Exit as Fed Chief Would Mark Break From Recent Precedent

By Josh Zumbrun Features Dow Jones Newswires

Janet Yellen's leadership at the Federal Reserve looks set to end after just one four-year term, the shortest tenure at the helm of the central bank in nearly four decades, and a break from recent precedent: The previous three Fed chairmen all were reappointed by presidents from the opposite party that put them in office.

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The White House has notified Federal Reserve governor Jerome Powell that President Donald Trump intends to nominate him to succeed Ms. Yellen when her term as central bank chief ends in February, according to a person familiar with the matter.

Given her predisposition to plot moves well in advance, she likely will make no more major decisions at the central bank beyond the next quarter-point interest-rate increase, which many market participants expect to come in December.

Ms. Yellen, the Fed's first female chief, led her colleagues to slowly and cautiously reverse the central bank's extraordinary stimulus programs adopted during the financial crisis, the subsequent recession and the sluggish recovery.

She built consensus within the central bank to move in well-telegraphed, measured steps to avoid roiling markets and disrupting the economy's slow progress.

Mr. Trump's decision comes as the economy is growing steadily and the labor market is at or near full strength. The Fed, however, failed on her watch to achieve its goal of 2% inflation.

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During the first 16 months of her leadership, the Fed held its benchmark short-term interest rate near zero as the unemployment rate fell and economic growth strengthened.

In December 2015, she guided the central bank to its first rate increase in seven years. The Fed has raised rates three times since then and in October bean shrinking the $4.2 trillion portfolio of bonds it purchased during and after the financial crisis to stabilize markets and boost the economy.

"She had to walk, and is still walking, a very fine line between a still fragile economy and risks of leaving too much accommodation in place for too long," said Roberto Perli, a partner at Cornerstone Macro and a former Fed economist. "I think she managed to strike the right balance."

It wasn't a foregone conclusion that the first postcrisis tightening of monetary policy would go so smoothly. In 2011, for example, the European Central Bank raised rates, but set its economy reeling, exacerbated the continent's debt crisis and swiftly reversed course. In 2013, Fed Chairman Ben Bernanke sent the Treasury market into a tailspin with remarks -- catching many investors off guard -- that the Fed would soon wind down its bond buying.

But under Ms. Yellen, U.S. financial markets have taken the Fed's moves in stride.

"Janet Yellen hasn't gotten enough credit for being right about the economy," said Russell Price, senior economist for Ameriprise Financial, adding that despite public debates around her moves, there have been no large and obvious policy screw-ups during her tenure.

Before the financial crisis, the Fed had never pushed interest rates so low, nor engaged in the bond-buying programs that dramatically expanded its asset holdings. There was therefore no playbook for the reversal of those policies.

"She's done a darn good job getting consensus around some very difficult questions on how to do this unwind -- they've made some very difficult decisions in a situation with no precedent," said former Fed Vice Chairman Donald Kohn, now a senior fellow at the Brookings Institution.

Because her policies were built upon broad consensus among the Fed's governors and presidents, it could be difficult for her successor to swiftly shift course.

Ms. Yellen came to the top job with a deep understanding of the central bank that began when she first joined as a staff economist in the 1970s. She later became a professor at the University of California-Berkeley, her longtime academic perch.

She returned to the Fed in 1994, when she was appointed to the Fed's board of governors by President Bill Clinton. She left the Fed again in 1997 to serve for two years as the chairwoman of Mr. Clinton's Council of Economic Advisers.

After a stint back at Berkeley, she rejoined the central bank in 2004 as president of the San Francisco Fed. She was elevated twice by President Barack Obama, becoming vice chairwoman in 2010 and then chairwoman in 2014.

Many Republicans in the Senate who opposed her feared her policies would be too dovish -- favoring low interest rates and higher inflation. Instead, she has raised rates and inflation has languished below the Fed's 2% target.

The national unemployment rate was at 4.2% in September -- the lowest level since early 2001 -- down from 6.6% when Ms. Yellen took office in early 2014.

As an economist who focused much of her research on labor markets, Ms. Yellen often emphasized that the national unemployment rate was understating the true amount of slack in the U.S. labor market. She cited broader rates of underemployment, such as rates including people who had stopped looking for work, and people who were employed part time but wanted full-time work. The broadest underemployment rate from the Labor Department was 8.3% in September, down from 12.7% when Ms. Yellen took the helm.

"Judging against the sweep of history, under her chairmanship policy has moved the economy broadly toward the two objectives that the Congress gave the Federal Reserve," said Mr. Kohn, referring to the central bank's so-called dual mandate to achieve stable inflation and maximum employment. "The inflation is a little bit in doubt right now, but you have to be careful there. Monetary policy works with long and variable lags."

Some observers wonder if Ms. Yellen has erred on the side of allowing too little inflation. The Fed's preferred inflation gauge, the annual change in the personal-consumption expenditures price index, ticked above 2% briefly in early 2017 but has since dropped to 1.6%.

While Ms. Yellen's term as Fed chairwoman looks to be winding down, her term as a Fed governor doesn't expire until 2024, and she hasn't ruled out staying on in that position.

A decision to stay would be unusual, but not unprecedented. Fed Chairman Marriner Eccles remained a governor for three years after not being reappointed to the top job by President Harry Truman.

Mr. Trump sometimes criticized the Fed's policies during the presidential campaign. But once in office he appeared to warm to Ms. Yellen, and said in July he was considering offering her a second term.

"I like her; I like her demeanor. I think she's done a good job," he said in a July interview with The Wall Street Journal. "I'd like to see rates stay low. She's historically been a low-interest-rate person."

Mr. Trump said Wednesday she is "excellent."

Ultimately, however, Mr. Trump opted to bring her term as chairwoman to an end.

Write to Josh Zumbrun at josh.zumbrun@wsj.com

(END) Dow Jones Newswires

November 01, 2017 18:06 ET (22:06 GMT)