In February of 2018 a new Federal Reserve Chair, barring Janet Yellen’s reelection, will preside over the levers that strongly influence the price of money. The odds for the front-runners are changing as quickly as the President tweets, so diving into who will be chosen seems fruitless at this juncture. Instead, let’s look back at some past leaders and their legacy.
Starting with Arthur Burns: Burns was the Chair of the Federal Reserve from 1970-1978. Appointed by Nixon, and often swayed by him in other respects, Burns held steady that the US should not break it’s 1944 promise to covert it’s dollars into- and hold adequate reserves of- gold. Despite his reservations, the “Nixon Shock” ensued. Along with the freeze on convertibility, for the first time since World War II an executive order was enacted to freeze wages and prices to combat inflation. Inflation was just under 6% at the time.
Two years later, in 1973, OPEC decided to place a special embargo on its product for any country it thought was supporting Israel in the Yom Kippur War. This caused the Consumer Price Index, a commonly used measure of inflation, to spike up to 12% in late 1974. Although this was an exogenous shock, this forced his hand and the Fed funds rate was brought to nearly 13%. Upon his departure from the role, Burns left inflation a bit quelled at 6.4%.
Next up to bat was strangely, at least in today’s terms for a Democratic Administration, a CEO. G. William Miller, the then leader of Textron, was a free-market man who brought the idea that inflation would fix itself to the table. From March 1978 to August 1979, Miller let inflation creep from 6.4% to 11.8%. History proved that this was not a time for dovishness. Instead of aggressively raising rates, Miller and Jimmy Carter’s team concocted a “dollar rescue package” to strengthen the greenback. To wilt accelerating fears of lower prices to come, the package featured a monthly sale of 1.5 M oz of US gold holdings and, as crazy as this sounds today, a treasury auction that denominated the bills in foreign currencies.
Miller was appointed Secretary of the Treasury in August 1979, relieving him of his duties as Fed Chair. Paul Volker, known for influencing Nixon on the halting of gold convertibility as Under-Secretary at the Treasury, was nominated by Carter. Volker wouldn’t be the first chair to inherit a mess. On his first day on the job, inflation was over 11% and a second oil crisis was unfolding. During the Iranian Revolution, Iranian oil output fell sharply. Global oil production was only modestly effected, but the headlines created panic. As lines at the pump expanded, the price of oil doubled. Unlike Miller, Volker saw high inflation as a threat, and acted accordingly. His unpopular policy of raising short-term interest rates higher than 20% during his tenure is attributed to the 1980-82 recession, but more broadly, to the end of a global fear of constant high inflation in the US. Short-term pain for long-term gain, most believe.
In June 1987, Ronald Reagan decided it was time for a change at the Fed. He nominated the Ford Administration’s former Chair of the Council of Economic Advisers, Alan Greenspan. (Ironically, Greenspan was known to follow the Taylor Rule when thinking of how to set the price of money, and today, John Taylor is in the running to hold the same office many years later.) Greenspan’s easy-money policy and easy regulatory stance earned him terms with four different Presidents. Known as the “Maestro”, he was credited with keeping the 1987 crash contained and the steady asset price rise over the 90’s. Greenspan, ever the monetarist, kept the two recessions (that some argue he may have triggered) he oversaw concise by lowering rates swiftly to create enough supply to avoid further damage.
Greenspan would pass the torch to Ben Bernanke. Much like Paul Volker, if only in this sense, Ben Bernanke was the heir of an impending economic calamity. Much like Greenspan, besides his aspirations of a transparent Fed, he served previously served as the Chair of the Council for Economic Advisers. Placed in February 2006, Bernanke was faced with difficult decisions early and often. In less than 18 months on the job, he began lowering the Fed funds rate from over 5% to basically 0%. Unlike most other situations in the past, manipulating the price of money through interest rates was not enough to avert disaster.
A scholar of business cycles, and the Great Depression, in particular, Bernanke was prepared to go to great measures to stabilize prices and the financial system- however unpopular or unorthodox. This led to both great criticism and great praise, depending on who you ask. Quantitative Easing, or QE, was one of these measures. In this process, Bernanke and the Fed purchased bonds from financial institutions and the US Government with money created out of thin air. This, along with a lower the cost of borrowing for banks, aimed to persuade them to bolster lending. This was just one month after the Troubled Asset Relief Program (TARP) was put into place to strengthen the financial sector by removing toxic assets from their balance sheets. The velocity of money (graph below) shows this was not as easy as massively increasing supply.
This first instance of QE, totaling roughly $1.3 trillion of financial sector debt and mortgage-backed securities, proved not to be enough to register on the “financial accelerator”, and another round was deemed necessary. Bernanke felt as though the interest rate and magnitude of credit available would strongly influence a bank’s willingness to lend-ergo stimulate growth. To boost aggregate demand, “Helicopter” Ben, as he was coined for his statements, dropped more money into the system in QE version 2. Two years later, this $600 Billion dollar adventure lead the Fed to the avenue where buying, and, by default, depressing the yields on, Treasury Bonds. On the third, and so far, final attempt at quantitative easing, Bernanke ordered a monthly purchase plan that added up to roughly $1.6 Trillion over sixteen months. Ending in October of 2014, QE in total was over $3.5T.
One year to the month later, Janet Yellen was chosen and nominated to replace Bernanke. Following the path of some of her predecessors, under the Clinton Administration, Yellen served as the Chair of the Council of Economic Advisers. She also served as the vice-chair to the Fed prior to her appointment as chair. Although she is seen as a “dove”,- when it comes to monetary policy, this means more interested in full employment than fighting inflation- Yellen raised the Fed Funds Rate for the first time in 10 years, in late 2015. Yellen, in an attempt to ensure the fed has ammunition in case of another act of instability, has carried rates to over 1% today. It is hard to argue this intent as we are wedged into the second longest bull market on record.
I am not in the business of predicting who will be next in line at the Fed. If I was, I’d be quite nervous based on the sheer volatility and breadth of opinions coming out of 1600 Pennsylvania Avenue. It’s anyone’s guess who will fill the space, but if the pick turns out to be hawkish, we could see this bull market die of something other than old age quickly.
Sources: FRED, St.Louis Fed
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