By Nick Timiraos
When Jerome Powell succeeded Janet Yellen as Federal Reserve
chief three years ago, he hosted a farewell dinner party for her at
his home in Chevy Chase, Md.
Back then, Ms. Yellen was passing the baton to Mr. Powell.
Three years later, in many ways, he is passing a baton back to
The Fed spent 2020 combating the economic fallout of the
coronavirus pandemic with interest-rate cuts, bond purchases and
emergency lending programs. As Fed officials prepare to meet this
week, Mr. Powell sees their policies on hold because they have
already committed to keeping rates at low levels.
Ms. Yellen, who was confirmed by the Senate on Monday to serve
as President Biden's Treasury secretary, hopes to oversee a
government spending wave aimed at making sure joblessness falls
much lower and preventing further widening in inequality. Mr.
Powell has handed the stimulus baton to her by pledging to keep
rates very low until that happens.
The former Fed colleagues have a history of working well
together. They formed a bond as top officials at the central bank
from 2012-18, at one time in adjacent offices. Mr. Powell, who
served as a senior Treasury official in the early 1990s, has
consulted with Ms. Yellen on policy in her post-Fed life.
Now, their shared experience and economic views set the stage
for the closest working relationship between their institutions
since the 2008 financial crisis.
This matters for the economy because it is likely to take some
of the burden off the Fed for spurring a faster economic recovery.
And it helps explain why the central bank likely won't be in any
hurry to raise interest rates even if Congress approves more
spending to boost growth.
Ms. Yellen will also be a key adviser to Mr. Biden on whether to
offer Mr. Powell a second term as Fed leader. Mr. Powell, who was
named to the Fed's board by President Obama, doesn't have a
relationship with Mr. Biden and didn't speak to him during the
campaign last year or since the election.
Mr. Powell, who is entering the final year of his term as Fed
chairman, faces a very different economic and political environment
than he did when he succeeded Ms. Yellen at the Fed in 2018.
At that time, given the experiences of the 1970s and 1980s,
economists, including Ms. Yellen, worried that very low
unemployment would fuel higher inflation. As Fed chairwoman, she
began to gradually raise interest rates in late 2015, and Mr.
Powell continued the effort during his first year as Fed
President Trump repeatedly admonished Mr. Powell to stop raising
rates and tried to install critics of Mr. Powell on the Fed's
board, though the Senate didn't go along.
Higher inflation never materialized, and in early 2019, Mr.
Powell signaled an end to rate rises. Falling unemployment spurred
wage increases as companies competed for scarce workers but not the
broader consumer-price increases once feared. The tighter labor
market helped to lift the fortunes of low-skill workers and
Then came the coronavirus pandemic. Many economists agree that
the Fed's fast and aggressive response helped prevent the health
crisis from becoming a financial panic, too.
The event led to unprecedented Fed coordination with the
Treasury Department on emergency-lending programs but also came
with friction between the two.
The emergency-lending programs wound down at the end of 2020
after a dispute between Mr. Powell and Steven Mnuchin, Mr. Trump's
Treasury secretary. Mr. Mnuchin's surprise decision after the
November election to allow the programs to lapse drew a rare public
objection from the Fed.
Mr. Mnuchin and Mr. Powell "did not see eye-to-eye on such
coordination, from all outward appearances, but Yellen and Powell
should be closer," said Glenn Hubbard, a top economic adviser to
President George W. Bush who worked with Mr. Powell at the Treasury
in the early 1990s.
Fed officials could welcome the Treasury's commitment to push
for more fiscal stimulus because it eases pressure on the Fed to
provide more monetary stimulus, which some critics say is
contributing to inequality by pushing up asset prices while doing
less for the broader economy.
Mr. Powell warned last year against relying too much on Fed
policy to deliver the dividends of tighter labor markets. "It took
[until] the eighth and ninth and 10th years of [the last decade's]
expansion to get those benefits," he said in July. "That's not a
good strategy -- waiting eight, nine, 10 years to get there."
One risk, some economists warn, is that the combined firepower
of the two institutions might overdo stimulus to the economy,
triggering some financial bubble or the inflation that few are
projecting. Until they see clear evidence of excess, though, Mr.
Powell and Ms. Yellen aren't overly concerned about overdoing
Their immediate priority is spurring economic recovery from the
effects of the coronavirus pandemic. But both leaders worry about a
deeper risk they want to avoid: The trap of slow-growth,
low-inflation and low interest rates that has plagued Japan for 25
years and Europe for the past decade.
The desire to avoid Japan's situation was one reason why the Fed
last August abandoned its longstanding strategy of pre-emptively
raising interest rates when unemployment falls to prevent inflation
from taking off. Instead, the Fed expects to leave interest rates
very low for years as the labor market heals.
Ms. Yellen endorsed the August change while warning against
relying too heavily on Fed policy to pull the economy out of a
ditch. "They've done almost all they can do," she said in
Their shared economic views could lead Mr. Powell and Ms. Yellen
to reconsider the past practice in which the institutions avoided
actively coordinating their policies.
Ms. Yellen will respect the Fed's independence, but "the world
is changing," said Nathan Sheets, a former senior Treasury official
in the Obama administration who spent much of his career at the Fed
before that. "We haven't fully figured out the nature of the
potential complementarities, but it's fair to say a Yellen-led
Treasury is well placed to work with the Federal Reserve in
thinking through the most constructive ways what that might look
Low interest rates make a big difference in the sustainability
of elevated government borrowing. Coordination between the Fed and
Treasury is a delicate subject because it raises questions both
about the central bank's autonomy to set short-term rates and who
ultimately controls fiscal policy, said Roberto Perli, a former Fed
Critics of Fed bond buying have in the past worried that large
central-bank purchases of government debt can cause it to leave
monetary policy too loose for too long to avoid higher federal
debt-service costs when rates rise. Ms. Yellen played down those
concerns in an interview last year and said the Fed wouldn't let
The Fed is currently increasing its holdings of long-term
Treasury securities, which helps keep their yields low. But Fed
officials say the purpose of that program is to meet its own goals
of 2% inflation in the long-run and low unemployment, not to help
keep the Treasury's interest burden low.
During the Obama years, the Fed and the Treasury sometimes
worked at cross-purposes. Back then, too, the Fed was buying large
quantities of long-term Treasury debt to hold down long-term rates.
Officials hoped that would help spur borrowing, spending and
investment by the private sector to speed up the recovery.
The Treasury then ramped up its issuance of long-term debt,
increasing the supply of bonds in the market. That locked in low
rates of borrowing for the public purse but put upward pressure on
long-term rates, undercutting the Fed's effort to hold them
Such steps were incoherent, said Lawrence Summers, who worked in
the Obama White House and was Treasury Secretary under President
Bill Clinton. He sees less risk of a repeat with Mr. Powell and Ms.
Yellen coordinating their efforts.
Ms. Yellen's background portends fewer tensions between the Fed
and Treasury "because you have somebody who's institutionally
comfortable with the Fed and who the Fed is likely to be
comfortable with," Mr. Summers said.
An early fight over the prospect of increased Fed-Treasury
harmonization in the Biden administration boiled over at the end of
last year. The outcome of that fight sharply reduced the prospects
for Ms. Yellen to expand Fed lending programs in ways some
In November, Sen. Pat Toomey (R., Pa.) persuaded Mr. Mnuchin to
wind down five emergency Fed lending programs that had backstopped
borrowing by businesses, cities and states. Mr. Toomey made sure
the pandemic-aid bill enacted in December prevented the Treasury
Department from restarting those programs.
He said he was concerned the programs would be misused by the
Biden administration after they achieved their initial goal of
rehabilitating dysfunctional markets. "The Democrats came along and
decided, let's morph this into some other purpose, like a general
fix-all for the economy," Mr. Toomey said.
Write to Nick Timiraos at email@example.com
(END) Dow Jones Newswires
January 25, 2021 18:48 ET (23:48 GMT)
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