Federal Reserve Chairwoman Janet Yellen conversed with economist Susan M. Collins, dean of the Ford School of Public Policy, about her experience as the leader of multiple public policy initiatives to a packed Rackham Auditorium Monday night.
University of Michigan President Mark Schlissel introduced Yellen, outlining the importance of the Federal Reserve to the University of Michigan, specifically the Public Policy School, which hosted the event. Regents Kathy White, Andrew Richner and Ron Weiser were also in attendance.
“The University of Michigan’s academic strength is further enhanced by the Ford School’s connections to the Federal Reserve,” Schlissel said. “Many UM students and graduates have interned or worked at the Fed.”
Yellen then launched into her discussion, starting with her experience in carrying out the dual mandate Congress places on the reserve: to uphold low and stable inflation rates and to maximize employment.
Yellen said the current economy, in comparison to the economy during the 2008 recession, is relatively healthy.
“In terms of the goals Congress has assigned us, we’re doing pretty well,” she said. “The economy is growing at a moderate pace, mostly supported by consumer spending. But housing is a little bit healthier than it's been, investment spending that had been quite weak last year is showing greater strength and the global economy, which was quite weak, now seems to be operating in a more robust and healthier way.”
The economy’s relative health has shifted the Fed’s current focus to sustaining economic strength, and Yellen said she hopes to gradually raise interest rates to a more neutral rate.
While the economy seems to be growing now, that was not the case during the Great Recession of 2008. In December of that year, Yellen effectively lowered the overnight interest rates to zero as a possible solution. When that wasn’t enough to revitalize the economy, longer-term interest rates had to be lowered as well.
Shockingly to Yellen and her colleagues, those rates remained for seven years — an unprecedented amount of time.
“We gave to monetary policy all that we had. We did everything we possible could to support the economy,” she said.
The shock of the Great Recession spurred many changes within the Fed, according to Yellen.
Its focus has expanded to banks outside the formal banking sector, and yearly stress tests are performed to analyze how the system would respond to severe economic stress. Yellen said these tests have been highly successful.
“We would examine where these institutions would be, what their capital would be if there were a highly adverse shock to hit the financial system,” Yellen said. “We want to be ahead of the curve and not behind it.”
However, this supervision has been criticized as overstepping the bounds of the federal government in the economy. Now all banks, including shadow banks, are a part of the banking system and are subject to supervision by the Fed. Yellen said this extension is an accomplishment, as it forces banks to hold more capital and more liquidity as opposed to being reliant on short-term funding, thus helping them control risk.
“Our supervision has changed in its character and is much better and focused on risks in the financial system as a whole and not on each individual institution — or the trees in the forest, as opposed to the forest,” she explained.
Yellen acknowledged the system of supervision isn’t perfect and noted much of the criticism comes from community banks that feel overburdened by the Fed’s regulations. Yellen says the Fed tries to tailor its approaches to shield community banks and some midsize banks from the regulations that are appropriate for highly systemic banks alone.
“I think we ought to tailor supervision so that it is appropriate to the risk of a particular organization,” Yellen said. “The most systemic institutions really deserve and require the highest degree of rigor and supervision and regulation.”
In addition to the successes of the Fed, Yellen highlighted some of her economic concerns. She noted the economy has only grown by about 2 percent overall since the recession and productivity growth has been slow, in part because of diminished technical innovation. To help solve this, Yellen recommended reallocation of labor from less productive to more productive firms.
“The fact that you could create that many jobs in the context of growth that is so low points to a significant problem,” she said.
Additionally, Yellen said certain bills, including the Audit the Fed bill, would end the Fed’s independence in making monetary policy decisions. Another bill seeks to simplify Fed’s decision to use a mathematical rule in setting interest rates. Deviance from this rule would require the Government Accountability Office to step in. Despite the message these bills are sending, Yellen said she sees independence as integral to the ethics of the Fed.
“The U.S. is well served by having a nonpartisan group shielded from short-term political pressures making these important decisions,” she argued.
Laurien Gilbert, a joint PhD student in public policy and economics, asked for clarification in regards to inflation. She and other students were asking preset questions from the floor.
“Students are often told that inflation is everywhere, a monetary phenomenon,” Gilbert said.
Yellen responded that, though the concept of inflation — too much demand for too small a supply — is simple, consumers often believe inflation negatively directs their buying habits.
In response to a question asked by Public Policy graduate student Matt Hillard, she said though the caution involved with articulating thoughts on policy is sometimes hindering, her career has been fulfilling. She advised students to explore their passions and urged them not to define themselves by the power of their jobs.
“The core of having a satisfying career first and foremost was finding something to do that I really love and am really interested in,” she said.