02 November 2017

Evaluating the Fed's First Woman Chair: How Labor and Stock Markets Performed During Janet Yellen's Tenure

The U.S. got its first Federal Reserve Chair in 1914. 100 years later the first woman was appointed to Chair the Fed. Now, after she has served the shortest tenure in 40 years, the country is once again getting a man as head of the Fed. 100 years of men. 4 years of a woman. Now, at least 4 more years of a man. That seems fair and balanced.

Trump announced the appointment of Jerome Powell to be the Fed Chair, replacing Janet Yellen after the end of her first term in February. It's worth examining how the economy did on her watch.

While the folks appointing Federal Reserve Chairman seem to have a gender bias, the economy apparently does not. Or if it does, it is a positive bias. Even though hers was the shortest tenure in 40 years and the second shortest tenure in 66 years, more wealth was created on her watch than during that of any other Fed Chair: $17.7 trillion and counting. In the nation's first 237 years, it created $78.5 trillion in wealth; in the last 3.5 years it has created an additional $17.7 trillion, an uptick of 22.5% in less than four years. (Yellen's 4 year term does not end until February of 2018.) This is, of course, at least partly due to the simple dynamics of compound interest. As Benjamin Franklin said, "Money makes money and then the money your money makes makes money too." As the nation creates more wealth it creates more wealth. Also, just this month consumer sentiment hit its highest point for the century. (Well, okay. Highest point in 17 years. But century sounds more impressive.) And the economy has created an average of about 2.6 million jobs a year, helping to drive unemployment down from 6.7% to 4.1%.  Things have been good during Yellen's tenure.

The big question facing Janet Yellen throughout her four years was when and at what rate to begin increasing interest rates. The trick is to keep inflation low while creating jobs. How did she do? Well, inflation is still low (it's bounced around 2%  - mostly on the low side - during her time) and the economy has created about 9.6 million jobs thus far into her tenure. Those numbers strike me as  flawless. And already she's begun to unwind the stimulus from the Great Recession; during her watch excess reserves at banks have dropped from $2.7 trillion to $2.1 trillion, a drop of $570 billion. (To put that in perspective, just before the Great Recession excess reserves were at $1.7 billion. Yep. Now it is over $2 trillion and  only a decade ago it was under $2 billion. She has unwound that by vast multiples of what it once was without scaring off investors or consumers. That deserves respect.)

Here is a graph that contrasts the average annual job creation and stock market performance under each of the last seven Fed Chairs.  The numbers are not final for Yellen, of course, because it will be about a half a year before the data is in on her full four year tenure.

In comparison to Yellen, the economy created more jobs per year under William Miller and the stock market did better under Miller and Paul Volker.
Miller wasn't normal, though. He was in office for only 18 months and he refused to raise interest rates to battle inflation during the late 70s oil shock. (Curiously, he was the last Fed Chair who did not have an economics degree; the most recent is Jerome Powell, Trump's new appointment.) Given he deferred addressing a bad situation, the economy did do well during his time but he left a mess to clean up; Volker was his successor and Volker's policies to bring down inflation triggered one of the ugliest recessions in the last half of the 20th century. So putting aside Miller's weird tenure, the punchline is that she did better than the boys in this century's old boys' club; no one else who served four years or more enjoyed the strong combination of labor and stock market performance that she did.

I could throw in all the usual caveats about how the economy is more than the result of fiscal policies defined by the Congress and President and more than monetary policy defined by the Federal Chair. And all of that is true. No president or Fed Chair invented personal computers or pioneered genetic engineering or venture capital. Still, monetary policy does help to determine things like inflation, interest rates and thus stock market performance and unemployment rates. The Fed's mandate is to keep unemployment and inflation low (but not too low) and it takes actions to do that. It is true that the economy is incredibly complex and luck plays a large role in what kind of numbers a Fed Chair presides over. That said, monetary policy matters and no one does more to define it than the Chair. If you are a woman or know one, you might be proud to see that the economy under Janet Yellen did as well as it did under any other Chair. While she did not get offered a second term, she should be proud of how markets - specifically labor and stock markets - performed under her watch.

We should consider appointing another woman someday. And maybe next time we won't wait a century.

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