Take Heart, Janet Yellen, It's Almost Over Now

After one more visit to to Capitol Hill, J-Yellz will ask "Here's me hat, what's my hurry?"
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It's been a long week for Janet Yellen, and will be a very long summer as it looks increasingly unlikely that she will succeed in her bid to win another term as Fed Chair.

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The first bombshell dropped when the leaky boat that is the current White House let it slip that rising Trumpista and former Goldman Sachs president Gary Cohn is the leading favorite to replace Yellen atop the Fed. Plenty could happen before the time comes to decide on Yellen's fate, but this is not a surprising development: Yellen is an even-handed, left-of-center technocrat, while our current president fetishizes Wall Street experience and places a premium on the type of fealty that Cohn has already demonstrated.

It's not just that her replacement is lurking (so much as Gary is physically capable of "lurking") in the headlines, though, it's also that she's slowly being surrounded by central bankers with different loyalties and agendas than hers. And it doesn't really help that the confusing jumble of economic data we've seen in 2017 leaves her and the rest of the Fed with little clarity about the medium-run outlook for the economy and a rather unpalatable policy knot to untangle.

But mostly it's that she had to talk to Congress about all of this during her twice-annual trek to Capitol Hill for discussions about monetary policy and whatever else the Capitol's adult day care House of Representatives wants to talk about.

These "chats" have developed a predictable rhythm in recent years: first Janet heads to the House and is greeted by Rep. Jeb Hensarling, forcing her to live out every New Yorker's nightmare of listening to a self-righteous lecture from an effete Texa for five minutes. Then a right winger whose main claim to fame is that he was the most conspicuously drunk man in Boston for a year in the 90s -- Rep. Sean Duffy -- shows her what it's like when he stops being collegial about his politicallty grandiose (and logically odd) requests for information and starts getting real. The next day, she heads to the Senate, where Sen. Elizabeth Warren plays her role as chief financial crusader of the left with Yellen as her symbolic foil.

While these circus appearances are surely unpleasant for Yellen, the headlines they generate have overshadowed developments that reveal deeper pressures building up for her at the bank. Adding those pressures to the rumors about Cohn, and we may soon be looking back on this as the beginning of the end of her chairmanship. Perhaps the strongest sign of this impending doom was news that the Trump administration had finally nominated Randal Quarles as the Vice Chair for Supervision, a Fed board position created by the Dodd-Frank Act and a move that had been rumored for months. His nomination is significant because from this post he can begin the Republican project of rolling back or altering the enforcement of many of the oversight rules that have been put in place during Yellen's chairmanship.

He also represents an ongoing shift away from academic economists or officials who rose through the ranks of the central bank (like Yellen did) occupying its top positions. Quarles has a notable background serving in the U.S. Treasury but is also a creature of the private equity world and there is little doubt that he will approach problems of policy with a focus on economic "growth" -- which in central bank terms means giving the financial sector what it wants.

The other major headache for Yellen is the deepening of the sort of reverse stagflation situation policymakers are currently confronting. Jobs numbers from last month showing a still improving labor market (a slight increase in the headline unemployment driven by workers "coming back" to the labor market -- economics!) amid flagging inflation, and suddenly Yellen and other Fed officials are hinting that they may begin tapping the brakes on their interest-rate hiking efforts as they look for clearer data signals. While this would indeed be a cautious and wise approach, the truth is that this current dynamic is one for which our current and woefully poor economic paradigm and models have little explanation, and therefore little to offer in the way of finding the correct policy approach.

Even the financial market response to these hints from the Fed signaled that there is something fundamentally unclear about the economy: equity investors saw a "risk on" green light and pushed up stocks, while bond investors poured money into the safe haven of U.S. Treasuries. The only silver lining for Yellen is that it by the time one half of the financial world finds out it is has bet wrong, it may no longer be her problem.

Robb Soukup is a freelance journalist who previously covered the banking sector and The Fed for S&P Global Market Intelligence.

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