On Tuesday, President elect Joe Biden announced that former Fed Chair Janet Yellen is his pick to be Treasury Secretary. Given her successful tenure as Fed Chair from 2014 to 2018, the pick looks like a winner from the start. Let's take a look at why she is a great choice in the current environment.
Success at the Fed
As a Fed governor, Yellen was considered one of agency's more dovish or pro-growth policymakers. In 2007, she was the only Fed policymaker to foresee the risks to the economy posed by the worsening housing market and sounded a warning at a Fed meeting.
During her leadership at the Fed, Yellen took interest rates off the zero bound as she started policy normalization off the emergency lows from the Great Recession. Despite raising rates from zero to 1.5 percent, the S&P 500 returned a stellar 12 percent compounded.
More importantly, she will work closely with current Fed Chair Jerome Powell whose term is set to end in 2022. This year, the Treasury and Fed worked hand in hand in stabilizing financial markets and providing massive liquidity to the markets and economy. The Fed provided the money while the Treasury used the funds for Main Street lending and asset purchases of corporates and even junk bonds.
Janet Yellen is a labor economist and she is just want the doctor ordered because millions of people are looking for jobs. Jobless claims just came in higher than expected and over 20 million Americas are still collecting some form of unemployment benefits.
In a NY Times op-ed entitled "The Senate is on Vacation While Americans Starve" in August, Yellen advocated for more stimulus.
When unemployment is exceptionally high and inflation is historically low, as they both are now, the economy needs more fiscal spending to support hiring. Monetary power sets the table and Congress’s fiscal dollars bring in the diners.
In this way, they form a potent one-two punch against stagnation. The Fed makes sure the credit backdrop supports growth; Congress and the president make sure families and businesses have enough money in their pockets.
Less tariffs, freer trade
Yellen is known for her support of open trade and international trade, but she also has not hesitated to criticize China's trade practices. She has credited globalization and trade liberalization with raising growth and lowering poverty around the world.
She was critical of Trump's tariffs on China calling them a tax on American consumers. She said, "Our trade restrictions on China could affect much of Asia which is linked to China through global supply chains. This could lead to a slowdown in global growth."
Bullish for Stocks
Wall Street cheered Biden's choice of Yellen by sending the Dow past 30000 for the first time in history. While Yellen has challenges ahead, she is a great choice to lead as Treasury secretary.
In recent months, stimulus talks have broken down in Congress but don't be surprised to see approval sooner than later. With COVID cases surging nationwide, senators from both sides of the aisle will be more willing to vote for much need money to support the economy. Yellen will be at the center of the talks once she is approved in January.
With a less adversarial approach to international trade, emerging markets and multinational corporations should be poised to benefit. Overall, Yellen should be bullish for stocks and the economy.