Here’s how the US economy could transform under Biden after his appointment of Janet Yellen as Treasury Secretary — starting with sizable stimulus

Ben Winck

Nov 30, 2020, 22:55 IST

Here’s how the US economy could transform under Biden after his appointment of Janet Yellen as Treasury Secretary — starting with sizable stimulus

Former Federal Reserve Chair Janet Yellen.BRENDAN SMIALOWSKI/AFP via Getty Images

President-elect Joe Biden's nomination of Janet Yellen to head the Treasury Department offers the clearest look yet at how his administration aims to drive an economic recovery.
The former Federal Reserve chair will enter the Cabinet as the first woman to run the department and become the first person to lead the Treasury, Fed, and White House Council of Economic Advisers.
Here's what Yellen's appointment signals for the Biden administration's economic policy, from near-term stimulus to Fed-Treasury cooperation.

Janet Yellen's decades of policymaking experience hint at how she will lead the Treasury Department through the US economic recovery.

President-elect Joe Biden officially nominated Yellen to run the department on Monday, setting her up to be the first woman to do so. Yellen was already the first woman to serve as a Federal Reserve chair, and, if confirmed, will be the first person to have helmed the Treasury, the Fed, and the White House Council of Economic Advisers.

The 74-year-old economist is set to enter the Cabinet at a time of intense economic strife. Coronavirus cases continue to surge higher, and data suggests the economy's initial bounce-back has slowed considerably through the fall. Economists warn the situation stands to worsen as government aid expires and holiday gatherings boost case counts.

From improving the relationship between the Treasury and the Fed to adjusting critical relief programs, here's how Yellen is poised to steer the Biden administration's economic policy.

New stimulus

The administration's first order of business on the economic-policy front will most likely involve fresh fiscal relief. Relief from the $2.2 trillion CARES Act is all but exhausted, and key jobless-benefit programs are set to expire in December.

With the pace of economic recovery waning, Democrats have pushed Republicans to pass another spending package. Yet both parties remain at odds regarding the size of a new stimulus deal, and months of negotiations yielded little progress. The Biden administration has indicated it will push for a multitrillion-dollar package in 2021, and recent comments from Yellen suggest she will push for new stimulus until the virus threat fades.

"There are some limits [to monetary policy] and it's important for fiscal policy to fill in that gap," the former Fed chief told Bloomberg TV in October. "While the pandemic is still seriously affecting the economy, we need to continue extraordinary fiscal support."

To be sure, the odds of a new bill reaching the president's desk hinge significantly on two run-off elections in Georgia. Democrats could take control of the Senate if they win both races, but a single loss would ensure a Republican-controlled Senate and likely prolong the current stimulus stalemate.

Senate Republicans will likely back a smaller aid package in 2021 and set their sights on paying down government debts as soon as the virus threat fades, Ernie Tedeschi, policy economist at Evercore ISI, said in an interview.

"Where Janet Yellen will be helpful will be telling policymakers not to take their eye off the ball. And that, even after a vaccine is distributed, we will still be far from fully recovered," he added.

Getting creative

If a fiscal relief deal proves hard to come by, Yellen could shift her focus to the lineup of emergency lending programs created earlier in the pandemic. Treasury Secretary Steven Mnuchin on Tuesday moved $455 billion in unused CARES Act funds into the department's General Fund, essentially requiring Yellen to obtain congressional approval before putting the cash back to work.

The move leaves the next Treasury secretary with about $80 billion to deploy across various lending facilities. The sum is a fraction of what Yellen likely expected to work with, but the former Fed chair's experience will help make the most of the leftover funds, Tedeschi said.

"Janet Yellen is arguably the best person positioned to make smart choices about where targeted support for the economy and financial markets should be," he said.

Reforming some of the lending programs established between the Fed and the Treasury can also help make the $80 billion more useful through the recovery. The two bodies could focus on lowering rates for specific municipalities and small businesses instead of maintaining their little-used credit facilities, former Fed economist Claudia Sahm told Business Insider.

While near-term fiscal stimulus is unlikely, significantly improving a loan's terms makes it "pretty close to giving people money," she added.

"These communities need a bridge. You can identify them," Sahm said. "The Fed will never do that because the Fed does not want to pick winners and losers. But the Treasury can because they're elected."

Fed-Treasury relationship

Yellen's years of experience at the Fed sets her up for healthy cooperation between the Treasury and the central bank. The relationship between the two frayed last week after Mnuchin unexpectedly called on the Fed to return funds allocated to emergency lending programs. The central bank responded with a rare public statement urging the Treasury to extend "the full suite of emergency facilities" past their upcoming expiration.

The dispute sparked concerns among economists that the two most powerful economic policymakers were butting heads just as the economic recovery was weakening. Such worries are far less likely to emerge with Yellen at the helm, Sahm said, adding that Yellen "understands what the Fed can and cannot do."

The former Fed chair also has a good relationship with current chair Jerome Powell, Sahm said. Powell served under Yellen during her 2014-2018 term as chair. Those years of cooperation set the stage for a successful relationship between the Fed and the Treasury under the Biden administration, Sahm said.

"They will be able to be very effective," she said. "If it was somebody that Jay [Powell] had never worked with, they would have created a working relationship. But it helps if you have a base to grow on. They work well together."

Labor-market focus

The former Fed chair also brings with her a strong focus on the US labor market. Yellen has specialized in studying employment and spent much of her time at the central bank updating the tools used to gauge labor-market health. Her "ability to question the orthodoxy" and decade-old metrics and replace them with better options "is rare and very useful," Sahm said.

That focus would come at a time of mass unemployment in the US. Though the unemployment rate fell to 6.9% in October, more than 11 million Americans remain unemployed. Jobless claims climbed for two consecutive weeks this month for the first time since July, signaling the labor market's recovery is faltering.

"If you care about full employment, if you care about workers, she has moved the dialogue in that direction," Sahm said.

Reviving the labor market is where Yellen's "credibility and gravitas will be most helpful to the Biden administration," Tedeschi noted.

Second act

Yellen is also no stranger to historic downturns. The economist served as the Fed's vice chair from 2010 to 2014, just as the US began to climb out of the Great Recession. No other candidates for Treasury secretary had "anything like" Yellen's experience in handling unprecedented downturns and making policy decisions that mattered, Sahm said.

"She has been in leadership roles in the darkest moments," she added. "The fourth quarter of 2008 was a very scary time. If you were inside of the fed, you knew that the world was sitting on the precipice."

Yellen also brings with her knowledge of how to fund an economic rebound. The former Fed chair has always been very focused on recovering first and dealing with government debt later, Tedeschi said.

"By her very nature, she is the opposite of a hack. She's an expert and incredibly well qualified for the job," he added.