Janet Yellen was the former Fed Chair. President Joe Biden’s rationale for naming Janet Yellen as Treasury Department head was clear: “Nobody is more prepared to handle this crisis.”
He referred to a K-shaped economic recovery, which had increased inequality following a pandemic that struck once in a generation. The government had a plan and Yellen was there to carry it out. After hundreds of million of Americans received vaccinations against Covid-19 and billions in additional government spending were made into the economy, normalcy would be restored under an extraordinary recovery.
One year later, a different problem — inflation — is dampening the recovery, sucking the oxygen out of strategy sessions, angering voters and threatening Democrats’ razor-thin governing margins. Even though economists warned and White House promised that the recovery would last a while, this is still happening.
Yellen is a former head of the central bank that is charged with managing and monitoring inflation. This is a time when it is at its highest point in four decades. How could the Biden administration have missed the warning signs and ended up in such a dire situation?
More than a dozen economists, current and former administration officials, and former Fed officials — requesting anonymity to speak candidly about private discussions — point to a confluence of issues, including heavy Fed influence across the administration, overreliance on traditional forecasting, the political pressure to spend big, and a lack of urgency in deciding who would run the Federal Reserve and carry out its mission of managing inflation.
Former Fed official says that it will always be a problem in White Houses, and how politics and policy interact. He asked anonymity for private conversations with the administration. They miscalculated, I think.
Both the Fed and White House did not comment.
Treasury is a think-tank
Yellen was elected to office early in 2021 and quickly moved to increase the staff of Treasury. The department had been severely reduced by Steven Mnuchin’s predecessor. To do so, Yellen poached experts in economics and labyrinthine political processes from the well she knew best — the Federal Reserve — causing a revolving door of new hires to spin even more quickly than normal.
Linda Robertson and Michael Kiley, former Fed attorneys Mary Watkins were among those who worked at the Fed’s top levels to help Yellen. Robertson and Kiley were only allowed to serve for a short time and since then have returned to the Fed. Robertson will shepherd the nominations to top Federal Reserve officials and Kiley will oversee financial stability. Watkins is still an attorney-advisor at Treasury, working with digital currencies.
The Federal Reserve began to hear a familiar joke. It compared the Yellen Treasury with the Italian Prime Minister Mario Draghi’s administration. Draghi had been filling in his ranks with former colleagues at the European Central Bank (Boss of Italy) during his time working there.
According to another former Fed official, “It was like: ‘The modern problem is trying to ensure administrations are independent from their central banks, not that central banks is independent from administrations,” he said. He requested anonymity in private conversations.
Fed Influx continued to reach Treasury’s organizational masthead and White House policy positions, as well as other regulatory agencies.
The two deputy directors of the White House’s National Economic Council — Daleep Singh and Sameera Fazili — have Fed and Treasury ties. Former Fed economists make up the Council of Economic Advisers. Two former Federal Reserve legal and regulatory officials were seated at the top of the Office of the Comptroller of the Currency. Yellen also recommended them.
Treasury’s most important personnel appointments feature Fed alums. Nellie Liang (undersecretary for Domestic Finance) was once the Fed’s first director of financial stability. Laurie Schaffer is the Fed’s acting general counsel. At least three other deputy assistant secretaries have oversight over financial regulation, macroeconomics.
According to several people who spoke anonymously, it was described by officials as operating in an unusually analytical way to deal with an organization that is traditionally very fast-moving, and focusing on the implementation of a variety of policy and problem-solving strategies to help President Trump’s agenda. The Fed model was irrelevant, so they tended to focus on the same data that the Fed.
Although the number of ex-Fed personnel in the Treasury has increased the communication between the Treasury and the central banking, formal channels remain well established.
Monthly lunches with the Council of Economic Advisers — the White House’s in-house forecasting shop — have largely resumed after a pause due to the pandemic and frequent personnel changes toward the end of the Trump administration. Yellen and Jerome Powell, Fed Chairman, exchange views at a weekly breakfast. This is a tradition that Yellen started when she was the head of the central bank.
Kevin Hassett was a frequent guest of Powell and Yellen during his time as chair of Trump’s Council of Economic Advisors. He said that Yellen would benefit from a balanced staff, while retaining the strong bond between Treasury, Fed, and Treasury.
CNBC’s Hassett said that “they look at things differently.” But I consider them a strong team.
Sarah Binder (a Brookings Governance Senior Fellow and historian) notes that tight coordination in monetary policy and fiscal policy during times of crisis is important but has an asterisk.
Binder is a researcher on the Federal Reserve independence. He says, “Certainly trust is important.” One might wonder if there’s a risk to groupthink, if this is all that exists.
Demand versus supply
Hassett was one of three former White House economists. Clinton Treasury Secretary Larry SummersJason Furman was also the Obama CEA chairman. Furman warned that inflation was imminent early in Biden’s term, while Covid was more important to government. They analyzed different data and came to the same conclusion: Prices would rise if there was too much stimulus spending.
CNBC spoke with Hassett that it was evident to anyone who has done modern macroeconomic modelling of inflation that the rise in inflation was imminent. Hassett announced that inflation had reached its peak in April of last year. “fire was on”Inflation was determined to be 7% by June. by the end of the year.
The December consumer price index report showed inflation at a rate of 7.7% annually. the hottest pace since 1982. The Fed’s favorite inflation gauge, prices for core personal consumption, rose by 4.9% and 5.8% in December. This includes gas, groceries, and food.
Traditional predictions were muted at the start of 2021. Private sector forecasts were 1.8% as of year-end. This was identical to the Federal Reserve’s estimate. Meanwhile, the Congressional Budget Office tracked even lower at 1.5%. The White House’s own estimates — calculated by the “troika” of the Council of Economic Advisers, Treasury and the Office of Management and Budget — hewed closely to those figures.
CNBC was told by a Treasury official that they were “almost within striking distance” of the Fed.
According to three individuals briefed or involved in discussions, White House officials in the early spring acknowledged that there was the potential for inflation due to stimulus spending and infrastructure spending. However, officials dismissed the threat citing political support of these policies and the need to boost the economy’s recovery.
Biden called for the passage of the $1.9 trillion pandemic stimul bill. This was just one month after Congress had approved an additional $900 billion package. Biden frequently lamented the insufficient size of the stimulus of $800 billion that Congress passed during 2009’s financial crisis.
“We’ve learned from the past crises that it is risky to do too little. Biden stated that the risk was not taking enough action, speaking to reporters at Oval Office in January. He signed the bill into law in March.
Yellen expressed support for the government’s determination to “go large,” but also was careful about whether prices may rise. In a series of Sunday TV news appearances, she said inflation was a “risk” of stimulus, and in May, she went a step further — suggesting interest rates may need to rise to keep a lid on inflationary pressures, a comment she later walked back.
“Janet [Yellen]Furman said that Obama’s former economist was worried about inflation “for a long while.” This is a distinction Furman made between the White House and Treasury Secretary. It was unrealistic to think that inflation would stop, even though there were many new factors.
A Treasury spokesperson claimed that Yellen thinks the legislation backed president was sound economics policy, which engendered a faster recover with less financial pain.
According to the spokesperson, “Secretary Yellen would not be the first one to state that there are more things to be done” and Treasury continued to work daily to support a strong recovery.
By the summer months, discussion — and acknowledgment — of inflation ramped up across the administration, according to multiple current and former officials. They said that internal estimates started to increase as a result. The private sector’s estimates increased to 3.7% while those of the Congressional Budget Office (Federal Reserve) saw inflation close to 3% at the end.
Treasury was coming around to the idea that prices would be going — and perhaps staying — higher than they had forecasted, the official said. In his July 14 hearing, Fed Chairman Powell stated that the Fed was seeing inflation in “a variety of products and services”.
Also, the CEA began to question its underlying thesis. A former Fed official recalls White House economist Heather Boushey raising the question about the cause of inflation during one of the monthly lunches during the summer, to wit, if the issue was one of supply — factory closures and transportation logjams and worker shortages limiting the goods that could get to consumers — that would work itself out.
But if the issue was demand — confident consumers with money burning a hole in their pocket — that could only be kept in check by the Federal Reserve.
The administration still expressed optimism that this trend would not last.
Biden claimed in July, “Our experts believe that and our data show that the majority of price increases we have seen are expected and expected be temporary.” Yellen had already defined “temporary” as an indication that price rises would recede by August.
The fall pivot
The administration changed its messaging as fall approached, when persistent inflation was starting to affect Biden’s approval rating. Cabinet officials repeatedly pressed the pavement, using inflation to indicate that the economy was strengthening, effectively suggesting the Fed may need to take action.
On Oct. 18, Transportation Secretary Pete Buttigieg stated that “Part of the problem isn’t just on the supply side. It’s also the demand side.” “Demand has exploded.”
A week later, Yellen made a much longer timeline to allow inflation pressures and other market issues to decrease.
“The already-occurring events mean that the inflation rate will continue to be high in next year,” Yellen said. told CNN on Oct. 24. “But I expect to see improvement by the mid-to-end next year, the second half next year.”
The Federal Reserve is responsible for addressing long-term inflation while the White House was focusing on short-term solutions to gas prices and the supply chain. Biden was still deciding whether to keep Powell as Fed chief after his term expires in 2022. This placed the Fed in an uncomfortable position, having to make a difficult monetary-policy determination without knowing who would carry it out. Yellen advocated for a second Powell-term, but the progressive legislators behind the scenes wanted assurances that the Fed board would include more liberal economists to reflect their priorities.
Trump appointed Randal Quarles as Fed governor in 2017, on November 8. announced he would resign from the boardHe died 11 years earlier than his term was up, creating a vacancy which allowed Democrats to take over the majority of seven-member board.
Quarles’ resignation was a sort of pivot point for the subsequent shift, although the exact extent of this effect is not known. CNBC was told by a person who participated in discussions that the new vacancy played a role in Biden’s timing decision to nominate Powell for chairman. According to another person who was briefed, the resignation was just a convenience reason for an earlier decision. Biden’s resignation and Quarles’ were not linked by the White House.
By the time Biden nominated Powell to a second term and Lael Brainard as a vice chair in late November, #Bidenflation was trending on Twitter, and “transitory” — the Fed’s long-favored descriptor for the inflation trend — was being made into memes. Biden and Powell pledged publically to control inflation during the nominating ceremony.
According to hindsight current and ex-administration officials, as well the Fed’s two former officials, the Fed would be better off if the nomination was made earlier and empowered the Fed sooner.
Powell claims that the Fed did not delay its pivot towards raising interest rates due to personnel changes. This was despite it being denied by Powell a week following his nomination. Powell stated in a conference that the strategy was created by him and his coworkers after they had analyzed the November early data on inflation and jobs. After this, several Fed officials demanded faster action.
Powell said to reporters Dec. 15 that this did not happen “by accident”. They were discussing taper long before President Obama made his decision,” Powell told reporters on Dec. 15.
As Powell awaits confirmation, the White House remains optimistic inflation will ease through a combination of the Fed’s now-telegraphed interest rate hikes and an eventual return to normal as the pandemic subsides.
Ron Klain (White House chief of staff) stated that Biden has no plans to make personnel changes within the Treasury and West Wing because of inflation.
These same models, which underestimated inflation 2021, now recommend moderation at the end 2022. Midterm voters will also have their say at he ballot box.
Furman is a former Obama administration official who said that he worries about the possibility of inflation getting worse. He also stated that the White House has a better tool than inflation: realisticism.
Furman explained that they used a tool they didn’t have before but now they do. “They are not exaggerating,” Furman added. Furman said, “There was this idea that inflation would disappear. “Now they are being much more realistic.”
– CNBC’s Steve Liesman and Patrick Manning contributed reporting
