US Federal Reserve chairwoman Janet Yellen. Picture: BLOOMBERG/ANDREW HARRER
US Federal Reserve chairwoman Janet Yellen. Picture: BLOOMBERG/ANDREW HARRER

President Donald Trump has chosen not to have Janet Yellen serve a second term as chair of the US Federal Reserve. That, however, doesn’t mean she cannot stay on as one of the Fed’s governors.

I see four good reasons for her to do so.

The first involves her unique technical expertise. Before entering public service, Yellen was a top-flight academic economist at Berkeley, a background that provides a strong foundation for her thoughts on policy. She is also able to draw upon a great deal of practical experience: she has been on the federal open market committee, which sets the central bank’s monetary policy, for the past 13 years and from 1994 to 1997. No other current governor can match her credentials. And in filling the three vacancies on the board of governors (four if Yellen leaves), Trump won’t be able to find anyone, Democrat or Republican, who can.

Second, the Fed needs governors with Yellen’s balanced perspective on the central bank’s dual mandate of maximum employment and price stability. The Fed, which has long emphasised its responsibility to keep inflation in check, needs internal voices willing to speak forcefully about doing what is necessary keep unemployment low. Thanks in part to her expertise in labour economics, Yellen provides such a voice. Trump’s appointments are unlikely to have that perspective.

Third, it appears that Trump and his appointees want to loosen the restrictions on bank behaviour that the Fed and other regulators have imposed since the passage of the Dodd-Frank Act in 2010. Their antiregulation approach will increase the risk of a new global financial crisis. It is thus important that the central bank retain governors who can push back against this dangerous venture — as Yellen did vigorously in a recent speech at the annual economics symposium in Jackson Hole.

The main counter-argument seems to be one of precedent: it has been nearly 70 years since a former chair stayed on as a governor. But not all long-standing practices are good. If the norm requires Yellen to leave the Fed, then it effectively allows the president to prematurely end a governor’s 14-year term. This robs the Fed of a crucial legislative protection of its independence. Such a norm needs to be broken — yet another strong reason for Yellen to stay on.

The country needs Yellen’s expertise and judgement at the Fed, and it needs clarity about the limits of the president’s power over the Fed. So I hope she chooses to keep serving as a Fed governor after February 1 2018.

Kocherlakota is a professor of economics at the University of Rochester. This column does not necessarily reflect the opinion of the editorial board or Bloomberg.

Bloomberg

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