If Anyone Can Make Investors Happy, It’s Janet Yellen
(Bloomberg Opinion) -- If Treasury Secretary Janet Yellen means anything to business, labor and the world right now, it is as the avatar of the moral that luck is what happens when preparation meets opportunity.
Yellen, who was the only female chair of the 108-year-old Federal Reserve, has never done anything without exceptional due diligence. Her best-in-class career delivering financial stability bodes well as she manages the deeply depressed No. 1 economy rebounding from the largest contraction in gross domestic product since World War II and restores American prosperity.
It's useful for investors and policy makers to keep Yellen’s record in mind as questions arise — most recently from Democratic economist and former Treasury Secretary Lawrence Summers — about the size of the Biden administration’s $1.9 trillion relief package and whether it risks overheating the economy.
In the post-Trump era of polarizing politics and mistrusted media, Yellen’s record of unflappable testimony will prove essential if Congress approves the stimulus.
Investors already know Yellen to be the epitome of assurance. In the $13 trillion market for government debt, the average volatility of U.S. Treasury bonds declined 25% after Yellen succeeded Fed Chair Ben S. Bernanke in 2014, and such price fluctuations were 30% lower than they were under Alan Greenspan, according to data compiled by Bloomberg.
To be sure, Bernanke presided over the worst financial crisis since the 1930s. Greenspan’s 19 years leading the Fed, from 1987 to 2006, included Russia's default, the Asian debt crisis and the dot-com debacle at the turn of the century. He belatedly acknowledged his mistake in raising interest rates to chase non-existent inflation in the mid-1990s.
For her part, Yellen has proved consistently correct about policies designed to improve labor and capital alike, whether it's raising minimum wages or protecting bondholders and shareholders. She was the first Fed official to publicly warn against the excesses of subprime mortgages in 2005 before the debacle exploded the credit markets in 2007.
As Fed vice chair, she helped discredit more than 20 esteemed economists and investors who assailed Bernanke — in a 2010 letter published in the Wall Street Journal — for his so-called quantitative easing policy and predicted a devalued dollar, plummeting bond prices and rampant inflation.
In fact, the economy and U.S. financial assets appreciated with little inflation because Bernanke and Yellen and their colleagues said the Fed can always raise the rate it pays on reserves — no matter how large the reserves — thereby modulating the rate of credit expansion.
This was a straightforward economics lesson that the critics of quantitative easing still haven't acknowledged a decade later. The Fed's QE policy helped bring the U.S. out of the worst recession since the Great Depression and allowed the U.S. to prosper to the point of being the only developed economy with record GDP by 2015, according to data compiled by Bloomberg. The Yellen-led Fed ended QE in October 2014 before the dollar, stocks and bonds traded serenely at their highs for the year.
Where the U.S. is struggling, Yellen “brings together a deep understanding of monetary economics, financial markets and an understanding of labor markets,” said Joseph Stiglitz, the economics Nobelist, in a radio interview in 2013.
Those skills were apparent last month during her testimony supporting major fiscal stimulus to help the economy recover from the pandemic. Yellen said “the world has changed” and “the future is likely to bring low interest rates for a long time.”
As a result, she said, even “though the amount of debt relative to the economy has gone up, the interest burden hasn't,” so “the most important thing we can do is to defeat the pandemic, to provide relief to the American people and to make long-term investments that make the economy grow and benefit future generations.”
Sure enough, the worldwide average of borrowing costs declined to a record low below 0.9%, according to the Bloomberg Barclays Global Aggregate Index, which began compiling data in 1990. For U.S. Treasury and corporate creditors, the benchmark rate has fallen to a record of less than 1.2% since such data was compiled in 1976, according to the Bloomberg Barclays U.S. Aggregate Bond Index.
At the same time, the implied volatility of Treasuries, a gauge that measures investor anxiety, remains near its all-time low, according to data compiled since 1987.
Yellen's justification for expansive fiscal and monetary policies is reflected in the benign reality that the U.S. pays less as it borrows more. Interest payments on the federal budget declined about 18% during the first 4 months of the current fiscal year, when the U.S. was running its biggest budget deficit since World War II.
During the next few years, servicing the national debt will be cheaper than at any time in the past half century when measured against the size of the economy, according to the Congressional Budget Office. That's because yields on $21 trillion Treasuries plummeted to record lows as the pandemic gripped the U.S. early last year even as the supply of debt surged to a record, according to data compiled by Bloomberg.
The favorable trend was disrupted last March when the benchmark 10-year Treasury yield surged to 1.195% from 0.543% even as the Fed and Treasury were providing investors with assurances that credit would remain easy indefinitely. Within a month, the yield returned to 0.584% but the resulting 83% increase in implied volatility was a serious reflection of the market's dysfunction, which is something Yellen will have to address.
Whether she is smarter or luckier, investors under the Yellen-led Fed enjoyed the greatest stability. The stock market, according to the VIX Index, which measures investor bets on future price fluctuations, showed the most confidence during Yellen's four-year term, at 15%; followed by Greenspan, 19%; Bernanke, 21%; and her successor Jerome Powell, 22%.
The economy under Yellen also was at its most stable with an average jobless rate of 5.1%, followed by Powell's 5.3%, Greenspan's 5.6% and Bernanke's 7.2%, according to data compiled by Bloomberg.
Although Treasury Secretary Yellen acknowledges the risk of rapid inflation from a robust fiscal policy that Summers is raising, she told CNN there is a far greater risk “that we leave workers and communities scarred by the pandemic and the economic toll that it’s taken, that we don’t do enough to address the pandemic and the public health issues, that we don’t get our kids back to school.’’
There is no guarantee the Yellen winning streak will continue. As the pandemic has shown, unforeseen disasters can quickly turn everything upside down. But no other high-ranking official has had as reassuring a track record in dealing with our era’s most challenging economic crises.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Matthew A. Winkler is Co-founder of Bloomberg News (1990) and Editor-in-Chief Emeritus; Bloomberg Opinion Columnist since 2015; Co-founder of Bloomberg Business Journalism Diversity Program in 2017. During his 25 years as Editor-in-Chief, Bloomberg News was a three-time finalist and winner of the Pulitzer Prize for Explanatory Reporting and received numerous George Polk, Gerald Loeb, Overseas Press Club and Society of Professional Journalists and Editors (Sabew) awards.
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