(This post was updated on February 10, 2021.)

EconExtra is a series of posts that go beyond the textbook, relating current events and recent developments in economics to content standards, and providing resource suggestions to help you incorporate the current events into your lessons.

The Event

With a new administration comes a new Cabinet. There is much speculation about what to expect from the Former Fed Chair, Janet Yellen, in her new role Treasury Secretary. She is the first woman to hold this position, and unquestionably one of the most qualified to ever hold the job. Your students might enjoy this rap video introduction to her.

One area of speculation is about what Yellen’s relationship with Fed Chair Jerome Powell will be, since she was his former colleague/boss and predecessor. The other question is whether or not Biden replace Powell when his term as Chairman of the Fed expires next year. These last two questions are related—the better the working relationship, the more likely it will be that Powell will stay in place for another four years.

The purpose of this post is to point you to some resources to help bring some color and current events to your discussion of monetary (and fiscal) policy. In addition to information on both Yellen and Powell, you will find resources to help cover the role of the Fed and the Federal Open Market Committee. It is also important to realize the limits to the Fed’s impact, and the role fiscal policy plays in the ultimate resolution to the current economic crisis.  

Yellen

Let’s first give some historical context to Biden’s choice of Yellen. Appointing a former Fed VIP as Treasury Secretary is not without precedent. Timothy Geithner, President of the New York Fed during the Financial Crisis and part of the triumvirate leading the response (with Fed Chair Ben Bernanke and Treasury Secretary Hank Paulson) went on to become the Treasury Secretary under Barack Obama.

Here are Yellen’s career highlights, as explained in an AP article.

"During the 2008-2009 financial crisis, transcripts of the Fed’s meetings show that Yellen was more prescient than most other Fed officials about the potential for a deep recession and weak recovery afterward.

She became Fed chair in 2014 when the economy was still recovering from the devastating Great Recession. In the late 1990s, she was President Bill Clinton’s top economic adviser during the Asian financial crisis.

Under Yellen’s tenure, the central bank began a seminal shift of its policy focus away from fighting inflation, which has been quiescent for decades, to trying to maximize employment, the second of its two mandates. That process culminated this summer when Powell announced that the Fed planned to keep rates ultra-low for a time even after inflation has topped the central bank’s 2% annual target level, rather than raising rates pre-emptively.

Yellen, a Democrat, had served only one four-year term as Fed chair when President Donald Trump decided to replace her with Powell, a Republican, despite Yellen’s desire to serve another term. That move broke a four-decade tradition of presidents allowing Fed chairs to serve at least two terms even if they had first been nominated by a president of the opposing party."

Powell (and Yellen)

So, will Biden go with tradition (letting Powell continue), or will he replace him in a year when his term expires? Powell is a Republican, but he  has the respect of both parties for his handling of the current pandemic-driven crisis, as well as for staying out of the fray of tweet storms of which he was often the subject.

In this CNBC video clip, Powell describes how he believes his working relationship will unfold with Secretary Yellen.

The Wall Street Journal has a great article describing the relationship between the two VIPs as well as the relationship between the two agencies. Below find the key points the article makes.

"The former Fed colleagues have a history of working well together. They formed a bond as top officials at the central bank from 2012-18, at one time in adjacent offices. Mr. Powell, who served as a senior Treasury official in the early 1990s, has consulted with Ms. Yellen on policy in her post-Fed life.

Ms. Yellen's shared economic views with Mr. Powell could lead them to reconsider the past practice of avoiding actively coordinating their policies.

Now, their shared experience and economic views set the stage for the closest working relationship between their institutions since the 2008 financial crisis.

This matters for the economy because it is likely to take some of the burden off the Fed for spurring a faster economic recovery. And it helps explain why the central bank likely won’t be in any hurry to raise interest rates even if Congress approves more spending to boost growth."

Federal Reserve Bank/Federal Open Market Committee (FOMC)

An earlier EconExtra focused on the new policy framework and “new” monetary policy of the Fed.  It is important to distinguish between the role of the Federal Reserve Bank (monetary policy) and the Treasury (fiscal policy.) This article from The Balance  describes the Treasury's function.

While the Federal Reserve Bank is supposed to be apolitical, the fact that its Governors are nominated by the President of the United States and ratified by the Senate means that there is some degree of politics involved. At this moment, all but one of the Governors (Lael Brainard) are Republicans.

This is a great infographic on the Federal Reserve Structure, the FOMC and how the Fed might impact your daily life from the Richmond Fed. This CNBC article explains the general structure and operations of the FOMC. If you are looking for more detail on the structure, operations and past actions of the FOMC, you can refer to these two articles from The Balance (FOMC, Schedule and Statements). There is also a (free) publication available from the Philadelphia Fed called A Day In the Life of the FOMC.

For a lively discussion of the Fed’s handling of the pandemic related economic downturn, you can listen to this one-hour panel discussion with one current and three former regional Fed Presidents sponsored by the CEE this week. There is much discussion of inflation targeting as well as the other tools utilized by the Fed to mitigate systemic risk and keep credit flowing during the downturn.

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