Gerald Epstein: If Yellen is Out, What’s Next for the Fed?

This Real New Network interview with Gerald Epstein, codirector of the Political Economy Research Institute (PERI) and Professor of Economics at the University of Masschusetts-Amherst speculates on what will follow for the Federal Reserve if, as expected, Trump fails to reappoint current chair Janet Yellen when her term expires next February. Epstein suggests that her successor will likely to be someone who would be expected to support financial deregulation– although he served up no possible names. One name that’s being widely and consistently floated is that of Gary Cohn, current head of Trump’s National Economic Council and former chief operating officer and president of Goldman Sachs, as most recently reported in this Politico piece from last week, Sources: Cohn is Trump’s top candidate to replace Yellen at Fed.

This short interview is by no means a comprehensive or perfect assessment of Yellen’s tenure as Fed chair. Nonetheless, it offers a quick precis of some key issues and I serve it up as a prod to spark discussion among the commentariat– many of whom hold nuanced and deeply considered views about the Fed’s recent performance, and what should follow, as well as what’s likely to follow.

Sharmini Peries: It’s The Real News Network. I’m Sharmini Peries coming to you from Baltimore. The Federal Reserve Chair, Janet Yellen, will end her term in office in February 2018. This week, as a part of her semiannual report to Congress, she appeared before the Congressional Committee on Financial Services. In the hearing, Yellen did dodge a question of whether she would accept a second term in office if President Donald Trump decide to reappoint her. In terms of her report, the discussion focused on economic policy, especially on monetary policy, on inflation, interest, and debt. Yellen gave an opening statement without mentioning the word “debt” even once. She proceeded to emphasize her plan for a gradual hike in the interest rate, and that she expects a slow-down in the inflation rate itself. On to talk about this with me is Professor Gerald Epstein. He is the Co-Director of the Political Economy Research Institute at UMass Amherst, where he’s also a Professor of Economics. Gerry, good to have you back with us.

Gerald Epstein: Yeah, thanks for having me.

Sharmini Peries: Gerry, Janet Yellen was appointed Chairwoman of the Federal Reserve by President Obama to replace Ben Bernanke. Now, unlike other previous chairpeople, she didn’t come from the management of corporate banking, but rather as a person from the academia with a background in the Federal Reserve itself, where she held several appointments. Now, is there a possibility that she would be reappointed, or is it unlikely that Trump will reappoint her?

Gerald Epstein: Well, most people, including myself, think it’s pretty unlikely that Trump will reappoint her, even though it is the norm for incoming presidents to reappoint the current chair. The last time that the president did not do that was in 1979, but of course, Trump doesn’t obey these norms, and most people think that he’s going to want to appoint somebody who is much less tough on financial regulation, though he probably doesn’t mind Yellen’s approach towards setting interest rates. I think in this discussion about the monetary policy and the role of the Fed and the reappointments, it’s really important to distinguish between these two aspects of the Federal Reserve. On the one hand, setting interest rates, and on the other hand, regulating the financial markets.

Sharmini Peries: Right, and Gerry, she even didn’t want to talk about debt very much. She even denied the fact that the Fed has been considering purchasing student debt, for example, and she didn’t mention household debt in the U.S. I understand it has skyrocketed. Does the Federal Reserve have this under control in terms of debt in our country, and of course, household debt as well?

Gerald Epstein: Well, I think the Federal Reserve, especially under Janet Yellen, is very concerned about there being excessive debt, excessive leverage, but I think that they’re sort of between a rock and a hard place. On the one hand, the way that they can under, using their normal tools, get the economy going, is by keeping interest rates low, getting people to borrow more. That raises the amount of borrowing and the amount of debt. Their hope, of course, is that that will get the economy to grow more rapidly so that if the economy grows rapidly, then even though debt goes up, the economy’s growing, so the ratio of debt to the size of the economy is not necessarily going up. But the problem, of course, is that the Federal Reserve isn’t using other tools that it might have at its disposal to get the economy going directly.

For example, the Fed Up campaign, which is a progressive campaign, has been trying to get the Federal Reserve to buy student debt, to lower student debt, to lend money to cities and municipalities to increase the infrastructure growth and so forth, and they haven’t been willing to do any of that. So they have been sticking mostly to fairly standard tools of monetary policy, buying government securities and the like, but let me get back to this issue of Trump and who he’s likely to appoint. It’s clear that, from what everything that Trump has been doing, they’re trying to reduce, eliminate the possibility of the Federal Reserve and other regulatory agencies from regulating Wall Street. They want to give Wall Street a free hand to do whatever they want, and Trump is very firmly in this camp, and he wouldn’t like to reappoint Janet Yellen because she’s been pretty strong on financial regulation, so he’s very likely to want to appoint somebody who’s going to support financial deregulation, and there are a number of candidates out there who are likely to want to do that.

Sharmini Peries: Gerry, a quick look at the graph of freezing inflation rates in the U.S. seem to fly in the face of what Janet Yellen was saying in terms of inflation slowing down. What justification would she have to claim that inflation is actually slowing down, and is it?

Gerald Epstein: Well, she wants inflation to rise, as many economists and other people do, because in some ways, it’s too low. The Federal Reserve and other central banks over the years have been kind of obsessed with keeping inflation low. They have a 2% target, but inflation is running below 2%. I think most economists think that low inflation, it’s now about 1.4%, 1.6% a year, is a sign of weakness in the economy, and so economists at the Economic Policy Institute, other progressive economists have suggested that the Federal Reserve should not be raising interest rates as long as there’s so much weakness in the economy. It’s true that the formal unemployment rate is relatively low, but what’s also true is that there’s been very little wage growth in the economy, and so if the Federal Reserve continues to raise interest rates despite the lack of bargaining power on the part of workers, that’s going to keep this monstrously unequal income distribution from being corrected.

Janet Yellen has been under enormous pressure to raise interest rates for a long time now, partly by investors, banks that want higher interest rates, partly by conservative Republicans and others who want higher interest rates, so she’s been trying to actually resist the pressure to raise interest rates, but she’s been doing it as slowly as she possibly can. But as the unemployment rate keeps going down, the pressure’s going to keep building, so she probably will continue modest increases in interest rates.

Sharmini Peries: Gerry, we are close to Janet Yellen’s end of her term. How would you rate her policies with the Federal Reserve, especially considering the impact on inequality in the United States?

Gerald Epstein: Well, as you said at the beginning, she doesn’t come from Wall Street. She doesn’t come from the financial markets, as many of the former Federal Reserve chairs have come. She comes at this from a perspective of really trying to fulfill the dual mandate of the Federal Reserve, to keep stable prices and to maintain full employment, and she’s taken this full employment mandate very seriously, much more, I’d say, than many of the other chairs of the Federal Reserve. She’s also introduced other topics into the discourse that other Federal Reserve chairs have not at all, namely income and wealth inequality, and also gender equality as well. She gave a speech recently on that, so in that sense, she’s been a breath of fresh air, as Chair of the Federal Reserve, and I think has navigated this very strong pressure for traditional Federal Reserve policy, raising interest rates, etc. I think she’s navigated that very well.

On the other hand, she’s been relatively unwilling to go well beyond what traditional policy has been in terms of undertaking some of these other kinds of policies that I’ve suggested, but she has had relatively few degrees of freedom to do that, so I would say overall, including trying to maintain financial regulation, Janet Yellen has done quite a good job, and it would be too bad, I think, if Trump did not reappoint her.

Sharmini Peries: All right, Gerry, I thank you so much for you joining us today and look forward to doing a proper assessment of Janet Yellen’s record in the Fed. I thank you.

Gerald Epstein: Okay. Thank you.

Sharmini Peries: And thank you for joining us here on The Real News Network.