Janet Yellen’s Fitting Finale: Fed Plans to Stand Still

WASHINGTON — Janet L. Yellen, the Federal Reserve’s departing chairwoman, will preside over her final policymaking meeting on Tuesday and Wednesday where, in a fitting finale, the Fed is expected to leave its benchmark interest rate unchanged as the economy continues to gain strength.

Yellen’s four-year tenure has been defined by her campaign to stimulate job and wage growth by holding interest rates at low levels for much longer than markets had expected.

Her patience was rewarded: Unemployment steadily declined while inflation remained low.

Now, as Yellen makes way for her successor, Jerome H. Powell, who was confirmed by the Senate last week, the challenges confronting the central bank also are starting to change.

The unemployment rate was 4.1 percent in December, and the Fed does not expect it to fall much further. Instead, as economic growth continues, it expects faster inflation. After hiking rates three times last year, Fed officials have predicted that they will raise rates another three times in 2018.

“Yellen had the uncharted territory of getting an economy going with low inflation,” said Seth Carpenter, a former Fed economist who is now chief U.S. economist at UBS. Powell, he said, “is going to be in a very different world: Fiscal stimulus when you’re already at full employment.”

Analysts and investors are unruffled by the impending departure of Yellen and installation of Powell. They have accepted Powell’s assertions during the confirmation process that he intends to continue the Fed’s current approach to monetary policy.

“The way I think about it is, Jay Powell will be a reassuring force of continuity,” said Vincent Reinhart, chief economist for Standish Mellon Asset Management.

Yellen is also leaving a clear road map. When the Fed began in October to reduce its holdings of Treasuries and mortgage bonds, which it purchased as part of its post-crisis stimulus campaign, it announced a multiyear timetable that it said would remain unchanged barring emergencies.

The Fed has made clear that the January meeting will be a place holder, not least because of the transition in leadership, and markets have taken the message. The headline on Morgan Stanley’s preview of the January meeting: “Where’s the Snooze Button?”

But markets are equally convinced that the Fed will tighten policy for the sixth straight quarter at its next policy meeting in March, which will be Powell’s first meeting as the chairman.

Yellen’s priority was ensuring that the Fed did not raise rates too quickly; Powell could face the challenge of making sure that the Fed does not move too slowly.

Fed officials said as they embarked on the tightening process that they wanted to avoid the mechanical predictability of the previous tightening cycle between 2004 and 2006. Like the proverbial frog in the stovetop pot, investors found it easy to ignore the slow and steady increases. But the Fed, wary of surprising markets, has once again fallen into a pattern of carefully signaling each rate hike — and markets, once again, are largely unconcerned. The ease of borrowing has increased over the past year, according to measures of financial conditions.

“They said that policy was too gradual and predictable” during the last tightening cycle, said Reinhart, who played a key role in the last round of rate increases when he was head of the Fed’s division of monetary affairs. “And now it is predictable and gradual and even slower.”

Under Yellen, the unemployment rate has declined to 4.1 percent from 6.7 percent in February 2014, while inflation has remained below the Fed’s 2 percent target. During the first three years of her tenure, in particular, Yellen repeatedly found reasons to argue that the Fed should delay raising interest rates, extending the Fed’s stimulus campaign.

Scott Sumner, an economist at George Mason University, wrote in an October appraisal that Yellen’s performance was “near perfection.” He added that, at the end of her tenure, Yellen will likely have achieved the Fed’s dual mandate of maximizing employment and stabilizing inflation “better than any other chair in history.”

There were plenty of critics along the way. A coalition of labor and community groups, the Fed Up campaign, pressed Yellen throughout her term to increase the Fed’s stimulus campaign. Republicans and conservative economists fretted that the Fed was doing too much. Chris Rupkey, chief financial economist at MUFG Union Bank in New York, said that the persistence of low interest rates had been painful for banks and other financial firms, many of which also resented Yellen’s focus on strengthening financial regulation. “It’s not goodbye, good luck from Wall Street,” he said. “It’s don’t let the door hit you on the backside on your way out.”

Eleanor Herlands, a 92-year-old retiree in Stamford, Connecticut, said that she and other savers had suffered during the long years of low interest rates.

“They pushed people to buy stocks, people that knew nothing about the stock market,” said Herlands, who opted instead to keep her money in savings accounts. “I made my own choices, but I never dreamed that it would go on this long. Now I’m pleased that I’m finally getting at least a little relief.”

She said she was now earning an average of 1.6 percent on her accounts.

Yellen, 71, is the first person in modern history to serve a four-year term as Fed chairman without being appointed to a second term. She has not said what she plans to do next.

She leaves behind some challenges for her successor.

Fed officials in recent months have begun to debate whether the central bank should adjust its approach to monetary policy before the next downturn. The Fed’s traditional approach is to stimulate growth by reducing interest rates. But rates, which reflect real borrowing costs and inflation, are expected to remain low for the foreseeable future.

The potential solutions mostly involve embracing more inflation.

The current economic expansion also is approaching the end of its ninth year, one of the longest periods of uninterrupted economic growth in U.S. history.

Some forecasters say they can see clouds on the horizon, though a little squinting is required. Oliver Jones, markets economist at Capital Economics, predicted the Fed’s march toward higher interest rates may finally begin to pinch financial markets by the second half of the year — just as the stimulus provided by the tax cuts is beginning to fade.

“As growth in the U.S. economy starts to slow, we think that the long-running rally in the U.S. stock market will go into reverse,” Jones wrote in his predictions for 2018. He added, “History suggests that a correction in the U.S. stock market would be contagious, even if growth in the rest of the world generally remains healthy as we expect.”