Janet Yellen dismisses idea that December rate hike was mistaken

Comments made at event designed as ‘humanising window’ into world of monetary policy

Janet Yellen has brushed aside suggestions that the Federal Reserve's December interest-rate increase was a mistake, as she described "tremendous progress" in the US economy since the financial crisis and defended the central bank's handling of it.

The Fed chair gave an optimistic assessment of America's performance, dismissing suggestions put forward by Donald Trump among others that it was a "bubble" economy, as she participated in a public discussion in a New York City lecture hall on Thursday with her three predecessors as Federal Reserve chair: Paul Volcker, Alan Greenspan and Ben Bernanke.

It was an unusual forum for Ms Yellen and her fellow economists, as they appeared on stage together while Mr Greenspan joined via video link from Washington DC.

The gathering was billed as a “humanising window” into their world that left aside the numbing mechanics of monetary policy. In keeping with that spirit, the audience at New York’s International House, whose seats were advertised at $1,000 (€878) each, were serenaded beforehand by a guitar-playing tenor running through arias including “’O Sole Mio”.


Largely absent from the evening was questioning about the Fed’s oversight of the booming financial system and hazardous mortgage lending in the lead-up to the financial crisis.


When Mr Volcker was at one point asked if any of his successors had put too much “vodka in the punch bowl” by running excessively lax policy, he merely responded that he looked at them with “great awe”.

Ms Yellen and her three predecessors were, however, questioned on topics ranging from the US dollar’s reserve status to ways of tackling the problem of banks that are too big to fail.

Among the central issues was the task of unwinding the Fed’s swollen balance sheet, which under Mr Bernanke exceeded $4 trillion as the former Fed chair attempted to counter the risk of an economic depression during the financial crisis.

Asked how the vast stimulus efforts he introduced during the crisis would be reversed, Mr Bernanke drily observed, “Fortunately I, don’t have to”, given that the job now falls to Ms Yellen.

But he argued that the process would not be “terribly problematic”, and that many of the supposed menaces associated with the stimulus efforts — including hyperinflation and a crashing dollar, had not come to pass. He added that he did not believe the Fed was out of ammunition if a renewed downturn occurred, although he said fiscal policy would need to carry some of the burden.


Mr Volcker joined Ms Yellen in dismissing the idea recently floated by Mr Trump, the Republican party’s presidential frontrunner, that the US was in the midst of a bubble. The former Fed chief argued that there were aspects of the financial sector that were over-extended, however, with an excessive reliance on short-term borrowing.

Ms Yellen insisted that many of the hallmarks of financial excess, such as overvalued asset prices, high leverage and rapid credit growth, were not evident. She added that some of the darker worries that had initially accompanied the Fed’s expansionary efforts had proved misguided, saying: “None of these terrible things have happened.”

“The US economy has made tremendous progress in recovering from the damage from the financial crisis,” she argued as she defended the Fed’s handling of the economy. “We have really done a great deal to foster a more rapid recovery.”

While some investors have criticised the Fed’s December rate increase, she said: “I certainly don’t regard it as a mistake.”


Both Mr Bernanke and Mr Greenspan chimed in that they did not see a looming risk of recession.

Asked about the pressures of the job, Mr Volcker, who faced the gruelling task of crushing the high inflation that built up in the 1970s, admitted that as Fed chair between 1979 and 1987 he had “worried all the time”.

Mr Bernanke, who oversaw the Fed’s battle against the financial crisis of 2007-09, added: “I didn’t take the job for adulation, and if I had, it wouldn’t have worked.”

Mr Greenspan, who served from 1987 to 2006, said that while the acclaim he received on Wall Street during his tenure had been awkward, he easily got over any embarrassment.

Copyright The Financial Times Limited 2016