As Fed Chair, Janet Yellen Discounted Economic Desperation. The Pandemic Will Likely Force a Different Approach.

Treasury Secretary nominee Janet Yellen will face the Senate on Tuesday for her confirmation hearing.

Federal Reserve Chairman Janet Yellen listens during a hearing of the Joint Economic Committee on Capitol Hill on November 29, 2017, in Washington, DC. (Photo by Brendan Smialowski / AFP) (Photo by BRENDAN SMIALOWSKI/AFP via Getty Images)
Then-Federal Reserve Chair Janet Yellen listens during a hearing of the Joint Economic Committee in Washington, D.C., on Nov. 29, 2017. Photo: Brendan Smialowski/AFP/Getty Images

Joe Biden pledged that his nominee for treasury secretary would be “someone who I think will be accepted by all elements of the Democratic Party … progressive to the moderate coalitions.”

In many respects, that is true. AFL-CIO President Richard Trumka said in a statement that “[Janet] Yellen is the right choice for all working families,” while Trump economic adviser Larry Kudlow said, “I think the Janet Yellen pick at Treasury was a good idea.” And much of the discussion around Yellen has focused on her becoming the first female treasury secretary, instead of on her record as Federal Reserve chair from 2014 to 2018 — where she repeatedly raised interest rates despite no evidence that the economy was anywhere close to full employment.

Yellen will face senators tomorrow at her confirmation hearing. While the January 6 assault on the Capitol and the ensuing threat of further far-right violence has taken precedence over news from the Biden transition, the decisions that Yellen makes — how seriously she takes the economic desperation suffered by millions of Americans — could determine whether or not in 2023 Sen. Ted Cruz, R-Texas, is the chair of the Senate Rules and Administration Committee overseeing the Capitol Police.


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In December, the economy lost 140,000 jobs, with a total of 9.8 million job losses since the coronavirus pandemic began. Rent debt could be as high as $70 billion. Fifty-four million Americans face food insecurity, an increase of 17 million from pre-pandemic levels. Mass transit cuts are happening across the country, further isolating low-income individuals, making them more dependent on expensive Uber and Lyft rides, and triggering job losses.

Yellen’s tenure at the Fed, which included rate hikes that almost certainly caused higher unemployment rates from 2015 through 2017, demonstrates that Yellen has, in the past, overestimated the strength of the economy for working people.

Her recent statements, however, suggest that the pandemic, along with the run of wage growth and unemployment decline after 2017 many economists thought wasn’t possible, has altered her thinking, and she now believes in aggressive action by the Fed and Treasury to continue to lift up the economy. In October, Yellen said, “While the pandemic is still seriously affecting the economy, we need to continue extraordinary fiscal support. … We need support for the economy from both monetary and fiscal policy.”

Which direction she chooses — austerity or stimulus, deficits or employment — will have enormous import for this deeply divided country.

The late journalist William Greider called his masterpiece 1987 book on the Fed “Secrets of the Temple” because the Fed gives itself an aura of impenetrability, too dense or complex for ordinary people to understand. Greider revealed that this is a deliberate political choice by the Fed to insulate its decision-making from democratic oversight.

The key problem is that the Fed has two mandates that are at odds: control inflation and expand employment. Inflation is often used by monetary policymakers as a proxy for wage growth for working people. So if the Fed seeks to control inflation, wage growth slows and unemployment goes up; if the Fed seeks to expand employment, the way the Fed measures inflation means that inflation will go up. Former Fed Chair Paul Volcker kept a card that detailed construction worker wages in his pocket, seeing his mission to fight inflation as inseparable from stagnating the wage growth of the working class.

“Inflation has been a reflection of class struggles,” said Samir Sonti, a professor at the CUNY School of Labor and Urban Studies. “In the late ’70s the Volcker Fed responded to wage inflation with monetary austerity without precedent, and the result was a recession that broke the back of the industrial labor movement.”

“Since the early ’80s we haven’t seen any real consumer price inflation and that is an expression of the weakening power of the organized working class,” Sonti said. “What we’ve seen is asset price inflation which is enabled by interest rates that can be kept low because there’s no significant working class threat.”

Yellen was appointed to the Fed in 2013, beating out Larry Summers for Obama’s nomination. Progressives despised Summers and worked against a potential Summers nomination, not least because he had worked with former Obama chief of staff Rahm Emanuel to limit the size of the $900 billion stimulus in 2009 — famously not even showing a proposal for a $1.8 trillion stimulus crafted by economic advisers Christina Romer and Jared Bernstein to the president for review. While by 2013 there had been significant economic recovery since the Great Recession, millions of Americans were still struggling, with 13 percent of the working age population unemployed or unemployed.

On December 16, 2015, Yellen announced that the Fed had raised interest rates for the first time in a decade. “I feel confident about the fundamentals driving the U.S. economy, the health of U.S. households, and domestic spending,” Yellen said. “There are pressures on some sectors of the economy, particularly manufacturing, and the energy sector … but the underlying health of the U.S. economy I consider to be quite sound.”

At that point, there were still nearly 16 million people either unemployed or significantly underemployed in the U.S., or 9.9 percent of the population (otherwise known as the U-6 unemployment rate). The inflation rate in the year prior was just 0.12 percent, the second lowest year on record since 1960. The Fed raised interest rates again in December 2016, when the inflation rate was 1.26 percent, well below the Fed’s 2 percent target rate.

Mainstream economists have praised Yellen’s record. “Under Janet Yellen the United States achieved some of the best outcomes in terms of both low and falling unemployment rates and stable inflation we have enjoyed in the postwar period, you can quibble with any given decision but the overall outcome was very good,” said former Obama economic advisor Jason Furman, who was referred to The Intercept by the Biden transition.

But others have said that Yellen raised rates too soon, artificially slowing down the economy while millions were out of work. The soft 2016 economy contributed to the election of President Donald Trump. “She presided over a premature rate increase,” said Rohan Grey, a professor at Willamette University College of Law. “She was the chair and this was a decision made by her board. It’s pretty clear that was premature. What it shows is that even someone who has framed themselves as a dove and pro-labor is that when push comes to shove she won’t stand out. She was in power and they prematurely tightened the economy and that’s a big problem.”

Yellen oversaw four more rate hikes during her time as Fed chair, one at the end of the Obama administration and three during her overlap with the Trump administration. The economy continued to grow, but the U-6 unemployment rate never dropped below 8 percent. The activist campaign “Fed Up” continuously urged the Fed to hold off on increasing interest rates, with concerns that it would prevent more Americans from getting jobs. In spite of those criticisms, the group did urge Trump to reappoint her as Fed chair.

Grey also raised concerns about Yellen’s closeness to deficit fearmongering groups like Fix the Debt. Yellen is a member of the advisory boards for both Fix the Debt and the Committee for a Responsible Federal Budget, which advocate for cuts to Social Security and Medicare.

“She said on the record that the national debt and the size of deficits has a sustainability concern in the long run,” said Grey. “And has in the past conceded that benefit cuts could help to address it. It’s a classic right-wing trope. She’s liked more by team blue but her language is not too different from Paul Ryan or Ron Paul.”

Sonti, the CUNY professor, for his part said that the economic impact of the pandemic may have altered Yellen’s thinking: The “crisis is of such magnitude that even the technocratic elite are likely aware of the need to change course.”

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