16/10/2018 Janet Yellen Calls Trump’s Attack on Fed Counterproductive - WSJ

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Janet Yellen Calls Trump’s Attack on Fed

Counterproductive
Politicizing the central bank would undermine it, its former chairwoman says

Janet Yellen at an event in Washington last month. PHOTO: ZACH GIBSON BLOOMBERG NEWS

By Nick Timiraos
Updated Oct. 15, 2018 1 38 p.m. ET

Former Federal Reserve Chairwoman Janet Yellen said President Trump’s attacks on the
central bank could be counterproductive if they cause investors to doubt the Fed’s commitment
to keeping inflation in check.

Ms. Yellen said Monday at the annual convention of the Mortgage Bankers Association that she
didn’t think the central bank or her successor as Fed chairman, Jerome Powell, would be
influenced by Mr. Trump’s criticism last week, in which he said the Fed had “gone crazy” in its
campaign to slowly raise short-term borrowing costs. That comment came amid the biggest
selloff in stock prices in more than seven months.

Ms. Yellen said that in 1994, just as she was beginning a term on the Fed board of governors, she
believed President Clinton was “very disturbed” that Fed rate increases might work against a
deficit-reduction agreement he had steered through Congress. Mr. Clinton, however, chose not
to publicly criticize the Fed for rising rates, she said, on the advice of his economic adviser,
Robert Rubin.

Attacking the central bank for raising rates as it deemed necessary “would politicize the Fed,”
she said. “It would undermine the confidence that the Fed has a commitment to price stability
and to politicize it and to undermine that is something that is essentially damaging to the Fed
and to financial stability.”

Ms. Yellen said Mr. Trump was entitled to express his view about monetary policy. “There’s no
law against that,” she said. “But I don’t think it’s wise.”

The former Fed leader, who resigned her post as Fed governor in February after her four-year
term chairwoman expired, said the economy was in a sweet spot for now, but she worried that
continued declines in the unemployment rate could reflect unsustainable growth that would
require more aggressive rate increases if inflation moved higher.

“I am worried about the economy overheating,” she said. If the economy continues to add more
than 150,000 jobs per month, the unemployment rate will fall below from its current 3.7% level,

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16/10/2018 Janet Yellen Calls Trump’s Attack on Fed Counterproductive - WSJ

a 49-year low, which could put pressure on prices and wages. The Fed seeks to keep inflation at
a 2% target, which it regards as a sign of balanced growth.

“We do have to worry about inflation picking up over time,” she said.

The root of her concern, which is shared among some former senior Fed officials, is that the
economy’s current growth rate of more than 3% can’t be sustained over time. If the
economy keeps growing beyond what it can sustain over the long run, it could lead to higher
inflation that would require a longer or more aggressive campaign by the Fed to raise rates.

The Fed has raised rates three times this year, most recently in September, to a range between
2% and 2.25%. Most Fed officials have projected another percentage point in increases will be
needed through 2019.

“The Fed has a tricky task in front of it” to slow the economy’s growth rate without causing a
recession, said Ms. Yellen. While such a soft landing is possible, she said the Fed would need to
be “skillful and lucky” to achieve it.

Ms. Yellen said she wasn’t overly concerned about a so-called inversion of the yield curve, when
short-term rates rise above long-term rates. Yield-curve inversions have typically predated
recessions, but Ms. Yellen said unusual factors in the bond market that have lowered the
premium investors demand for holding longer-term bonds have made the yield-curve signal
less reliable than in the past.

“If I were sitting there and asking myself the question, ‘should the Fed absolutely stop before
the yield curve inverts,’ I might be willing to say this time is different.”

Write to Nick Timiraos at nick.timiraos@wsj.com

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