President-elect Joe Biden is set to nominate Janet Yellen as Treasury secretary – the 78th in US history and the first woman. Given her strong economic credentials and tenure as chair of the Federal Reserve, she is extraordinarily well qualified.
She faces tough challenges at Treasury.
First and foremost will be near-term support for the US economy as America grapples with the pandemic’s horrendous impact and as distribution of a vaccine remains months away. The new administration will back large-scale fiscal support given massive unemployment, food lines, deteriorating state and local government finances, and the expiration of many protections. The president will play a key role negotiating fiscal support with, in all likelihood, a stingy Senate majority leader, Mitch McConnell. Yellen will help negotiate and provide intellectual backing, making the case that now is the time to spend and that with low debt service costs, America should not fret in the near-term about rising debt.
Yellen must consider what can be done to help the economy in the absence of strong fiscal support, given McConnell’s probable stance. She will look at whether Treasury can help backstop Fed facilities – and their terms – after her predecessor Steven Mnuchin’s uncooperative action unwinding Treasury’s existing support, plus what else might be done with executive orders.
Biden proposed tackling infrastructure and climate as part of his ‘build back better’ strategy. Yellen’s Treasury should early on start weighing how to advance these causes, even if they go beyond the near-term fiscal effort. Addressing them, especially with a Republican-led Senate, may prove difficult, though all agree more infrastructure spending is needed.
Second, Treasury-Fed co-operation. With less fiscal support given the serendipity of newly found parsimony in Congress, a greater burden will be placed on the Fed to deliver monetary policy accommodation, even though monetary policy’s impact is substantially reduced around the zero-lower bound. Contrary to Mnuchin’s action to close down Treasury support for Fed facilities, the two agencies have a longstanding record of seamless co-operation and Treasury has long respected the independence and prerogatives of the Fed. Yellen, having been Fed Chair and worked closely for years with Jerome Powell, will carry on that tradition.
Third, Treasury has played a key financial stability role since the 2008 financial crisis. The Dodd-Frank act gave the Financial Stability Oversight Council the powers to deploy systemic designations and focus on financial risks. It created the Office of Financial Research to look across the financial system, collect data and measure risk. The FSOC has been quiescent under the Trump administration. As shown by the financial ructions in March, the FSOC failed to adequately address risks from non-bank financial intermediation – risks largely outside the Fed’s purview. Yellen, former Fed Chair Ben Bernanke, and former Treasury Secretaries Timothy Geithner and Jacob Lew criticised the Trump FSOC’s rule to water down the designation process for non-banks. The Trump administration also slashed OFR’s budget. The FSOC and OFR need revitalisation.
Fourth, Treasury plays a lead role on international macroeconomic and financial issues.
The routine of attending G7 and G20 finance gatherings and International Monetary Fund-World Bank meetings – which Yellen well knows – will allow the Biden administration to highlight its emphasis on the renewal of multilateralism.
A key task will be reengaging China. Relations between the US and China will remain strained with America’s entire political spectrum focused on Chinese technology, forced technology transfers, statism and industrial policy. Trump abandoned his predecessors’ strategic dialogues. But China and the US – the world’s two largest economies – share an interest in a healthy global economic and financial system. US and Chinese economic teams have worked well in the past, despite broader tensions.
The Trump administration’s increased resort to unilateral US financial sanctions caused global discord about dependence on the dollar and US financial system. The new team won’t foreswear unilateral sanctions. But it will undoubtedly seek more multilateralism in using sanctions – working with allies, the G20 or the United Nations, for example – and show sensitivity to the dollar’s global role in sanction decisions.
In managing currency politics, Treasury engages countries pursuing perceived harmful currency practices and pushes them to cease intervention and provide transparency, while avoiding protectionism. The Trump administration took a different path, risking currency wars with its focus on bilateralism, trade protectionism, and granting powers to the Commerce department and US Trade Representative respectively to invoke countervailing duties and launch trade investigations for currency undervaluation. The Yellen Treasury will have to manage ongoing tensions with surplus Asian countries, but should reassert full primacy over exchange rate policy issues.
Yellen will also need to determine a path forward on digital taxation to avoid this topic becoming an irritant for other areas.
Fifth, she might be well advised to build up Treasury’s role as a think tank on economic policy-making and climate. The talented domestic economic staff is small and the coming decade will require new thinking on fiscal policy, its relationship with monetary policy, and inequality. The Biden administration and Yellen are keenly interested in addressing climate issues. There are important international climate policies to tackle, where the Trump Treasury eviscerated the climate focus built up by Hank Paulson, Tim Geithner and Jack Lew, to say nothing of pressing domestic environmental policies.
The agenda facing Janet Yellen is large and not for the faint-hearted. Welcome to 15th Street.
Mark Sobel is US Chairman of OMFIF.