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Sunday, December 06, 2020
Janet Yellen Will Make Her History to Be Great Treasury Secretary

On November 30, U.S. President-elect Joe Biden has formally nominated Janet Yellen to be the next U.S. treasury secretary. If confirmed by the Senate, Yellen would become the first female treasury secretary in U.S. history. She will also become the first person in the U.S. financial sector to have served as Chairman of the Federal Reserve, Secretary of the Treasury, and Chairman of the Council of Economic Advisers. While her expertise and past achievements have been recognized by the U.S. government and academia, issues such as promoting the U.S. economy to recover from the COVID-19 pandemic as soon as possible, and addressing the unemployment crisis and the widening gap between rich and poor will be the top challenges she will face. If Yellen can drive the U.S. economy out of the pandemic in her new role, she will undoubtedly be one of the greatest treasury secretaries in the country.

In a recent television interview, Yellen spoke of the damages caused by the combination of the Covid-19 pandemic and the recession, with the most vulnerable groups suffering the most. "It's an American tragedy and it's essential that we move with urgency. Inaction will produce a self-reinforcing downturn, causing yet more devastation," Yellen said. She also called for addressing deeper structural issues such as race, gender, and income inequality as well as stagnant wages. Her televised interview also showed the current dire situation of the economy and employment in the U.S. The interview received several calls from the Midwest revealing that life is harsh for people there in the face of the pandemic. Many shops have closed, people have lost their jobs, and it remains unknown whether the shops will be able to reopen. This shows both the dire situation Yellen faces and the importance of her mission. The economic challenge facing Biden basically rests largely on Yellen, and that presents immense pressure and high expectation.

In fact, Yellen, who worked with Ben Bernanke during the 2008 financial crisis, has extensive experience in how to "save" the economy. Since Yellen became Fed Chair in 2014, the U.S. unemployment rate has fallen from 6.7% to 4.1% in 2018, close to full employment. In addition, the U.S. dollar and the U.S. stock market have also had strong performances during her tenure. During Yellen's tenure as Fed Chair, the Fed also went through five interest rate hikes, raising interest rates from zero levels and gradually scaling back the scale of bond purchases under quantitative easing (QE). Of course, the "QE exit" policy led by Yellen has also caused some controversy, as it is regarded as too dovish due to the constraints of capital markets, resulting in insufficient policy space in the later period. During the time, the "moderate" Yellen was also not endorsed by the more radical President Donald Trump, resulting in her not continuing in her second term as Fed Chair. However, her work is still widely recognized in terms of the overall performance of the U.S. economy in the aftermath of the financial crisis.

But for now, as the pandemic continues to spread, even with the "exuberant" performance of capital markets and the prospect of widespread vaccination, the U.S. economy will still face the threat of recession within six months. According to the latest data, the employment situation in the United States has shown a trend of continuous decline under the impact of the pandemic. The U.S. nonfarm payrolls added 245,000 jobs in November, down from 610,000 jobs in October and the fifth consecutive month of declining growth; the unemployment rate stood at 6.7% in November. As Nobel Memorial Prize in Economic Sciences recipient Joseph Stiglitz noted recently, "It is too late for a V-shaped recovery. Many businesses have gone bankrupt, and many more will do so in the coming weeks and months; household and firm balance sheets are being eviscerated. Worse, headline figures may belie the depth of the crisis. The pandemic has taken a massive toll at the bottom of the income and wealth distribution."

Regarded as a proponent and practitioner of neo-Keynesianism, Yellen has long stressed that fiscal and monetary policy must focus on tackling unemployment, and that inflation targets should give way to employment. In terms of her usual "dovish" tone, Yellen is expected to push aggressively for a new stimulus package that would provide more aid to households, businesses, and local governments hit by the coronavirus outbreak. This is also consistent with the Fed's repeated calls for easing. Yellen's new role naturally facilitates a consistent pace and stance by the U.S. Treasury Department to address economic issues. This means that in the period ahead, it is likely that with the Fed keeping interest rates low, U.S. government spending and deficits will still expand, and the interplay of the Fed and Treasury Department is likely to lead to a prolonged lingering low in the U.S. dollar index.

In the short term, therefore, many market institutions expect the dollar will continue to depreciate as the new round of U.S. stimulus is implemented. The dollar's weakness is likely to continue for at least another six months as investors continue to turn to riskier assets and seek higher returns, according to a Reuters poll of currency strategists. This marks a change from the way the past decade's economic boom attracted investment into U.S. Treasuries and high-cap tech stocks.

This is certainly the unprecedented pressure Yellen will face in her first few months in office. She will need to make trade-offs and balances on how to allocate fiscal funds more in favor of the real economy and real businesses in order to boost employment. Yellen needs to keep the capital market rising modestly, avoiding both capital outflow and rapid expansion of market bubbles. She will also need to strike a balance between spending more and avoiding debt expansion, with the right timing and intensity of the short-term stimulus to avoid a premature rebound in inflation. Maintaining a balance between these three factors will be a challenge to her capability and wisdom.

If Yellen is able to carry out the task of reviving the U.S. economy and avoid a rapid rise in inflation, then the U.S. economic recovery and employment improvement will naturally help the U.S. dollar and U.S. stock market to regain their momentum. However, the emergency policy will no doubt face far more difficulties than in the post-2008 scenario. One of the main factors, in fact, is whether the prevention and control measures of the COVID-19 pandemic are in place. Containing the spread of COVID-19 will be fundamental to the economic recovery of the United States, which may not be something that Yellen can control.

Final Analysis Conclusion:

History gives Janet Yellen a "second" chance to save the U.S. economy. If she is able to shoulder the burden, she will undoubtedly prove to be one of the greatest treasury secretaries of the United States.

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