Article originally appeared in Barrons.com (here)
WASHINGTON—Former Federal Reserve Chair Janet Yellen on Tuesday countered President Donald Trump’s criticism of the Fed, questioned his approach to trade, and downplayed fears of an imminent, deep recession.
In a wide-ranging conversation in front of a packed room of financial advisors at the Charles Schwab Impact conference in Washington D.C., Yellen weighed in on her view on the economy and interest rates, the risks the U.S. faces from a tight labor market and a rising deficit, and Trump.
Here are some of the highlights:
On Trump’s recent criticism of the Federal Reserve and tightening monetary policy:
Yellen said she disagreed with the President’s view and supported her successor, Jerome Powell, in his decision to interest rates. Yellen also said it was unwise for presidents to comment on Fed policy. “Economies function better when the Fed can make independent decisions based on the goals laid out by Congress,” she said. “What concerns me is the President undermining confidence in institutions serving the public interest. To the extent the President’s comments intensify and lead Americans to doubt the Fed is acting in the best interest of the public, that would concern me.”
As to Trump’s complaints the Fed is moving too fast, Yellen noted that the Fed is moving at about half the pace it did in 2005, when it raised rates 0.25 percentage points at each meeting—seen as a measured and very gradual pace. Yellen says the Fed has the scope to move gradually to raise rates a couple more times.
On U.S. economic growth:
Yellen thinks the recovery could become the longest in history—a record it would hit in July. While she worries about the buildup of debt in nonfinancial companies, she doesn’t see any financial trends that give her “grave” concern or that could end the recovery. The question, though, is if the economy could overheat.
At the moment, she says all signs point to a continued tight labor market. For example, the ratio of job openings to unemployed people is at a record high. The measures for the difficulty firms are having in hiring are at higher levels than 2006 and 2007 and surveys that look at the perception that jobs are plentiful is at near record levels. “If the labor market continues to tighten, it may be that inflation picks up more than the Fed’s objective and they have to go toward more restrictive monetary policy.
She doubted the ability of the economy to expand at the 3% growth the Trump Administration has forecast, unless there was an increase in productivity or population growth through an immigration boom—not something she sees happening. Asked if tax cuts had changed the DNA of the economy and offered a productivity boost, Yellen said that while the cuts may have improved sentiment its quantitative impact, based on the analysis of “reputable economists,” would likely be small. She says it could increase growth by 0.1% or 0.2% but was unlikely to push economic growth from 2% to 3%. “I do worry that when [President Trump] criticizes the Fed, its legitimacy is liable to be undermined if the president says we could be growing at 3%, 5%, or 8%, if the Fed wasn’t raising rates.”
On the next recession:
The risk is if the Fed tightens too much and fiscal policy turns to restraint at the same time. Yellen puts the odds of a recession greater in 2020 at better than one in five, but says it doesn’t have to be a ”deep, terrible recession.”
On the trade war with China:
Over the next year or two, Yellen worries about the impact of tariffs on spending. While it could boost inflation temporarily by 0.1% or 0.2%, she worries more that the uncertainty created by trade could inhibit spending. Ultimately, she thinks tariffs could be more deflationary than inflationary.
Yellen also said she worries about the role of the U.S. in the global economy and the recent approach to trade as a, “I win, you lose,” type of arrangement rather than the past approach of achieving a win-win. “I don’t understand President Trump’s priorities regarding trade,” Yellen says. “Frankly, I worry about the U.S. abandoning what I think has been a stabilizing and constructive role in the global economy in the post-World War II period.”
Yellen downplayed concerns China may use its Treasury bond holdings as part of its arsenal in a trade escalation, noting that China needs Treasuries to manage their exchange rates. “It would hurt China more than the U.S.,” Yellen says, adding that she doesn’t see a hard landing for China’s economy either.
On the national debt
At 77% of GDP, national debt is not at crisis levels, but is on a scary courseas the population ages and the costs of entitlements rise from 10.5% of gross domestic product to 15% of GDP over time, putting the U.S. on an unsustainable debt path. If she had a magic wand, she said, the fix would be to both increase taxes and decrease entitlement spending.