In a recent interview, the renowned female economist Janet Yellen was critical of US President Donald Trump’s economic prowess. Yellen says Trump demonstrates a “lack of understanding” as she prepares to become president-elect of the American Economic Association.
In a recent interview with Marketplace Yellen describes the Federal Reserve as powerful and influential but also independent. She believes the understanding of its policies and its own communication of them to the American public is vital. But of Trump’s understanding of macroeconomic policy and the US Federal Reserve’s role she’s scathing.
He’s made comments about the Fed having an exchange rate objective in order to support his trade plans, or possibly targeting the U.S. balance of trade. And, you know, I think comments like that shows a lack of understanding of the impact of the Fed on the economy and appropriate policy goals.
Yellen outlines the goals of the Fed assigned by Congress as “maximum employment and price stability” but that she doubts Trump “would even be able to say that.”
The economist does believe the US economy is doing well but the recent period of economic growth in 2018, which she says is “probably around 3 percent” is not “sustainable.”
Her interviewer questions this as for years 3% growth was normal. Now says Yellen:
We’re in a world of both slow labor force growth and low productivity growth.
A sustainable growth rate would be nearer 2% or less but this slowing doesn’t necessarily mean a recession.
And I don’t believe we will have a recession this year, but of course it is a risk
Yellen does say that “financial conditions have tightened” and, the stock market has fallen back. But, uncertainty itself can be fuelling the risk of a recession.
Financial conditions do matter to the actual outlook, so that linkage is there, that fear that there will be a recession can trigger changes, could bring one on.
The ex-Fed chair is evidentially keeping her hand in despite not being reappointed to Fed chair by Trump. She gives a nod to current Fed chair Jerome Powell and the Fed’s recent “reassuring words” and “watchful waiting” are helpful.
It is not locked into some predetermined course, that it’s watching the economy very carefully and will address risks whether they require interest rate increases or cuts.
Yellen does believe the Fed made mistakes in communication during the financial crisis a decade ago. The public thought the Fed was protecting investors and Wall Street. But in fact, the Fed used a “discount window” to protect credit to businesses and households.
It really is important that the public see the Fed as an institution that cares about Main Street.
The economist takes an active part in ensuring the Fed now communicates better with citizens. She says this in itself is a “policy tool.”
And of course, the Fed has to battle Trump’s own scathing rhetoric against the independent body when trying to get their economic stance across. Though US Federal Reserve presidents, namely Neel Kashkari, are known to say the body “does not exist to protect investors.” Its wait and see stance in 2019 fuelled a stock market rally. Speculation abounds that now the Fed could cut interest rates in 2020. Janet Yellen believes Donald Trump himself could be driving market uncertainty.
Last modified: May 20, 2020 12:17 AM UTC