Former Federal Reserve Chair Janet Yellen Discusses Tools for Managing Financial Crises

Former Federal Reserve Chair Janet Yellen discussed the role that the Fed can play in protecting the global economy during future financial crises in a talk at the Yale School of Management on November 26.

In a wide-ranging conversation moderated by Andrew Metrick, the Janet L. Yellen Professor of Finance and Management, Yellen touched on a number of economic issues. Yellen’s visit also included a conversation with students in the Master’s Degree in Systemic Risk program and a celebration of Metrick’s installation as the first holder of the Yellen chair.

Issues discussed by Metrick and Yellen included the management of inflation rates and price-level targeting to help an economy recover from crisis, and the threat posed by today’s growing volume of leveraged lending.

Yellen’s  visit to Yale followed the U.S. Federal Reserve’s recent announcement that it is conducting an unprecedented systemwide review of its tools, policies, and communications strategies, a decade after the global financial crisis. She said that the review is being driven by the concern that the Fed does not have enough tools to readily address a crisis.

“This is a problem we really had to face in the aftermath of the financial crisis,” she said, when the Fed’s actions included cutting interest rates, lending to troubled financial institutions, and buying trillions of dollars of distressed assets.  “The fundamental problem is it took a long time for those tools to work, and if we hit another downturn, there’s a real question as to whether or not the Fed will have sufficient ability, even using that full toolkit, to address it.”

Yellen said that policymakers should focus on developing new strategies. “I think monetary policy shouldn’t be the only game in town,” she said. “I think fiscal policy should be able to play a constructive role,” but that role is limited by already large deficits and political opposition to new spending. “[It’s] not obvious that there’s a great deal of scope for fiscal policy to be able to contribute a lot, so there’s a problem.”

Soliciting feedback from the public and from the research community can assist the Fed in determining new policies, Yellen said.

She added that a message of inclusivity to the public was critical during her tenure as chair.

“I wanted the public to fully understand that the Fed is committed to Main Street and the welfare of ordinary citizens, and not just the protection of Wall Street—[that it is]not an agency that is trying to enrich Wall Street bankers.”

This “was particularly important after the financial crisis,” she said, when the Fed’s bank bailouts fueled the perception that the agency cared only for bankers. “Nine million people lost jobs,” Yellen said. “An awful lot of Americans lost homes and lost their savings, and there was a widespread perception that that’s really unfair.” But the bank bailouts, she explained, were for the good of “Main Street.”

“What the Fed knew and understood was that the people, at the end of the day, who get hurt when the financial sector dries up and implodes, are the people who work in the economy… We had to make sure that there was a continued flow of credit into the economy, and that was the point of those interventions… but, boy, getting that message across… was something we really had to try hard to do.”

As chair, Yellen said that it was also important to her to serve as a role model. “I do think it’s the responsibility of women, including myself, who have risen to higher levels to be promoting the careers of women and diversity in general,” she said.

While the chair seemed to be the next logical step in her long career at the Fed and with other institutions, Yellen said, the public saw it differently. “It might have been some small step in my own thinking about my career, but it was a gigantic leap as far as most women and many people were concerned,” she said. “The outside world does identify the chair with the institution, and certainly women felt it was a huge step... I did want to pave the way so that more women could be chairs of Federal Reserve banks and be successful on Wall Street.”

About the Event

Please join us for a conversation about economics with Janet Yellen, former chair of the Federal Reserve, and Andrew Metrick, the Janet L. Yellen Professor of Finance and Management. This event is open to the Yale community. Advanced registration is required.