A Conversation with Janet Yellen
March 30, 2018
On Monday, March 19th, Dr. Janet L. Yellen made her first public appearance post-tenure as the Chairman of the Federal Reserve, as part of the Crawley Lecture Series organized by the Wharton Undergraduate Division. A trailblazing macroeconomist, Yellen’s contributions to society have been lasting and broad. Yellen served as the Chair of the Federal Reserve from 2014 to 2018, nominated to the position by President Obama after serving as Ben Bernanke’s Vice Chair from 2010 to 2014. She also led the San Francisco Federal Reserve as President and CEO, was the Chair of the Council of Economic Advisors under President Bill Clinton and has been an award-winning teacher and researcher at Harvard, LSE, and Yale. Currently, Yellen works at the Brooking Institute working to increase the American public’s understanding of the economy. She was joined by Faculty Affiliate Professor Jeremy Siegel for this conversation.
Yellen began by reflecting on her time at the Fed. Serving as Chair was an honor and privilege which she very much enjoyed, despite the high degree of stress associated with the job. Just two days after her talk, her successor Jerome Powell would host the first press conference following the two-day meeting of the Federal Open Markets Committee (FOMC). Yellen recalled the pressure of having to properly communicate the message from the FOMC meeting knowing markets would react bullishly or bearishly to the nuances of her announcement.
On February 5th, Yellen began her new role at the Hutchens Center in the Brookings Institute, focusing on monetary and fiscal policy with colleagues Ben Bernanke and Donald Kohn. She was thrilled to work with such notable economists and former Fed Chairs in order to contribute to the public understanding of the economy and the Federal Reserve’s activities.
Siegel asked about Yellen’s path to the Fed and about her start in economics. Yellen recalled her Economics 1 class at Brown during her undergraduate freshman year, where she was hooked on the combination of rigorous logical and quantitative analysis methodologies being applied, and most profoundly concerned with human welfare. “Let me use my analytical skills to contemplate questions of first order importance to society: well-being, inequality, welfare and markets,” she thought.
During her senior year, Yellen considered applying to graduate programs just as notable economist James Tobin came to Brown to speak. Tobin, who had previously served on John F. Kennedy’s Council of Economic Advisers, was a revolutionary thinker in the field at the forefront of developing new economic theories at Yale. Yellen followed Tobin to Yale and was closely mentored by him in a lively environment where she and her colleagues were doing exciting research. Her thesis, for which Tobin was an advisor, was about unemployment in open economies, and after receiving her PhD she went on to pursue a notable career in academia.
Professor Siegel pushed Yellen on her close association with James Tobin, an economist whose theories and views seemed to oppose those of another influential academic, Milton Friedman. Friedman had studied the Fed and its actions very closely through the lens of monetary policy, whereas Tobin was more Keynesian and considered Fiscal policy just as, if not more, important.
Fed Chair Ben Bernanke was mentored by Friedman, and despite the stark difference in their academic upbringings, Yellen recalled that it was actually quite interesting to see how similar their policy views were while she served as his Vice Chair.
“Ben and I see the world very similarly,” she said, acknowledging that Tobin had read and admired Friedman’s work despite disagreeing with it, and the reverse also occurred. “Ben had understood and saw the way the Fed had failed the country in the Great Depression by allowing banks to fail and the money supply to contract.” Yellen agreed with all of these conclusions, affirming that “he and I were totally in agreement with one another.”
“I don’t think either of us ever expected to live through a financial crisis,” Yellen continued. “It was a huge surprise.” Before the crisis became apparent, having the sense that neither of the two wanted to repeat the Fed’s mistakes during a huge crisis was a huge motivator. “He and I were completely on the same page,” she asserted.
Yellen further analyzed the work of Tobin and his impact on financial markets through his Nobel Prize winning work on portfolio choice under uncertainty – essentially, not to place all your eggs in one basket while making investments. Tobin and his colleagues at Yale were interested in understanding a range of financial assets and how they influenced the economy. Reflecting on the crisis, Yellen said that the Fed applied many of Tobin’s theories in their decisions to push the economy back towards recovery.
Tobin felt strongly that the economy was not self-equilibrating in the absence of government intervention to smooth out extremes in the business cycle and movements to and from full employment. Yellen said that today’s thinking at the Fed is very closely aligned with this theory: both fiscal and monetary policy affect the economy and need to be properly deployed in order to avoid adverse impacts on stability.
Not only has Yellen’s career at the Fed been notable in her role in pulling the American economy towards recovery from the Financial Crisis, but she has been the first female Chair appointed in history. Siegel shifted gears by asking her about the role of women in economics, and how her gender has affected her career.
“At all points in my career, I have found myself as a woman in a small minority,” Yellen said. When she served as an Assistant Professor at Harvard, she recalled only 2 women out of approximately 50 or more faculty members in her department. Similarly, in policy positions, “when you look around the table, there are relatively few women.” This underrepresentation has been further emphasized during international meetings of central bank governors. In the most recent meeting she attended about two years ago “out of 115 central banks, 16 governors were women – about 10%. And that showed tremendous improvement because in all the years before than had only been single digit numbers of central bank governors who were women.”
Yellen continued, stating that “half the central governments have no women at all, either as governors or on a policy board. Women are very significantly underrepresented.” She also acknowledged that while it is clear that discrimination does exist, her own experience has been very favorable, and she can’t point to overt discrimination at any point in her career. Instead, Yellen noted the role of male mentors who took a strong interest in her and helped promote her advancement.
One of these mentors was her spouse, Nobel Prize winning economist George Akerlof. The two had spent over a decade working closely with each other in academia and as her husband, Akerlof consistently supported her desire to be involved in policy and made sacrifices for the sake of Yellen’s career. “I have been very fortunate in that respect,” she says.
But why are there so few women? Yellen does not have an immediate answer but observes that within universities fewer women study economics than men, in the private sector the “higher up you go the smaller the representation of women,” and the same trends hold true in the public sector where “there are precious few women.”
Yellen attributes these differences to some combination of barriers to advancement, mentorship and the difficulty to find female role models, social networks that facilitate collaborations and research, and the desire to combine work and family. “This phenomenon deserves better understanding, and it is important for the economics profession that it be more diverse.”
Siegel moved to ask about Yellen’s successor and current Fed Chair Jerome Powell, more specifically on the most significant challenges he and the Fed will face in the next four years.
“The current state of the economy is highly favorable,” Yellen confirmed. The unemployment rate is 4.1%, about the lowest in 17 years. Other measures of the labor market also suggest its strength and more market slack. Wages are rising at a moderate pace, and no real evidence has yet to emerge of the economy overheating. Overall, the “labor market is in a desirable state.”
Yellen noted the first challenge: that inflation has been running under the 2% objective from the Fed and has been for the last 7 years. She asserted the importance of moving inflation back to this 2% level since low levels of inflation foster low interest rates. “If inflation expectations were to slip and fall below 2%…when the next financial crisis comes the Fed will be starting with lower inflation expectations and a lower average level of interest rates.” Yellen concluded that lower expected rates implies that monetary policy will be less effective.
She also commented on the rapid job growth rate the economy has sustained, stating that the Fed should continue to raise rates in order to reduce the pace of job growth to avoid economic overheating. Despite these directives to increase inflation and the interest rate, Yellen cautioned against a hike that causes inflation to tighten too quickly, which could cause a recession. “Tighten too slowly and the economy may overheat. Tighten too quickly and perhaps inflation won’t move back to 2%.”
The second challenge Yellen anticipates is the Fed’s monitoring of the financial system to ensure the seeds of a future financial crisis are not growing. She noted elevated Price to Book and Earnings multiples which should be salient risks for governors. Overall, Yellen believes the financial system to be sound – “systematically important banks are well capitalized and strong,” and supervision has been strengthened post-crisis.
Siegel reflected on the recent productivity slump that international economies have been experiencing during this economic recovery, asking Yellen for her thoughts on this phenomenon. She confirmed the decline in business dynamism and the slowing pace of business formation while noting this trend started well before the financial crisis and looks to be global. Yellen pointed to the high likelihood that the cause of the decline is likely structural since it has occurred internationally.
Yellen concluded by reflecting on why former Fed Chair Alan Greenspan had missed the signs of a financial crisis. “Greenspan was not alone in this,” she said. “He, and we, had too much faith in financial firms to manage their risks in financial markets, to appropriately price risks in derivatives in the role that they would play.”
“I think there was great confidence at the time that derivatives were serving to distribute risk to those who could best understand and bear the risk, and that financial firms understood the risks they were taking and had appropriate incentives to manage them,” Yellen added. “The financial crisis showed that all of that confidence was misplaced, and supervision of the largest financial institutions was not what it should have been.”
Today’s stress tests and forward looking measures of capital adequacy give us better insight into the risks of the financial system, she said. Reflecting on the foundation of the Fed in 1913 after the Financial Panic of 1907, it is clear how much the organization has evolved over the last century. While programs to monitor emerging threats in the economy are a relatively role the Fed has played, Yellen is fully confident that her successor will continue to manage the Fed’s critical role in stabilizing the American and global economy.