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A particularly interesting area to watch will be the relationship between fiscal policy – the power to tax and spend, which will soon be partly under the leadership of Ms Yellen – and her former area of monetary policy, the power to adjust the money supply. These lines have become more blurred this year. The response to the pandemic was organized as a joint effort between the Treasury, which is investing billions of dollars in capital to support debt markets and the Fed, which administers the programs and lends billions more from its own unlimited balance sheet to make them more numerous. powerful.
But so far there have been obvious schisms. The Fed has been more inclined to structure the programs to further help the economy, but with a greater risk of the Treasury losing money, while the Trump Treasury has been more cautious.
Meanwhile, the Fed is buying vast amounts of Treasuries and keeping interest rates close to zero indefinitely, seeking to stimulate the economy – and effectively giving the government carte blanche to spend if necessary to contain the economic fallout from the pandemic. This raises thorny questions about how independent the central bank is from the rest of the government in times of crisis and should be.
Ms. Yellen will address these questions steeped in the institutional values of the Fed, where she began her career as a young researcher. She served as president of the central bank’s San Francisco outpost, vice president, and four years as a leader. She and Jerome Powell, the current Fed chairman, have been colleagues for many years. She gave him much of the difficult and unglamorous job of overseeing central bank operations.
When she and Powell have breakfast and regular lunches that are typical of the occupants of their jobs, there will be an irony of the fact that, as an economist, has a more conventional resume for a president he and the Fed, a lawyer and former Wall Street and Treasury official, has a work history more typical of a Secretary of the Treasury.
Expect however to exert pressure for a more liberal use of emergency credit facilities to support the economy, while maintaining a relatively traditional view of the importance of the independence of the Fed and its ability to shape monetary policy without being fooled by political authorities. A Treasury secretary less attached to the Fed might have a more flexible view of the roles of the two organizations.
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