The last meeting of the Federal Open Market Committee (FOMC) chaired by Janet Yellen, which took place on January 31, did not change the stance of monetary policy or make any meaningful changes from December in the policy statement. Jerome Powell, who has served on the Fed board since 2012, will take over as chair of the next meeting in March. Given that Powell has voted with Yellen at every meeting she chaired, there is little reason to expect much change in Fed policy.
The fact that Yellen's four-year term as chair was largely uneventful should be counted as a major success. The reason is that the Fed did not screw up a smooth return of the US economy to full employment and price stability. Yellen has been a participant in the FOMC since 2004, first as president of the Federal Reserve Bank of San Francisco and then as vice chair at the Federal Reserve Board in Washington. She played a critical role during and immediately after the global financial crisis of 2008, alongside former chair Ben S. Bernanke, in supporting bold and imaginative efforts to prevent a financial meltdown and boost economic recovery.
It is now clear that the Fed should have used its policy tools even more aggressively in the first few years after the crisis. (I made that case as early as 2009 in this blog.) But we should remember that the Fed's actions in 2008 through 2014 were unprecedented and it faced far more criticism for acting too boldly than for being too timid.
Looking forward, the primary challenge facing the Fed is how to revamp its policy framework in response to the new environment of ultra-low interest rates. The worry is that the Fed has less running room for both its conventional policy tool, the short-term interest rate, and its unconventional tool, long-term bond purchases to drive down the long-term interest rate. Options include raising the inflation target, switching to a rising price level target, targeting the level or growth rate of nominal GDP, and expanding asset purchases beyond government and agency-backed bonds. Yellen acknowledged the importance of this issue in one of her last press conferences. It is unfortunate that she will no longer be in a position to lead the evolution of the policy framework.
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