The Big Four Meet

Richard (Jichen) Huang

On Thursday, April 7th,  Janet Yellen and her predecessors Ben Bernanke, Allan Greenspan and Paul Volcker, all spoke at a conference in New York City, celebrating the Fed’s 100th anniversary. The event, held at the International House, marked the first time so many Federal Reserve chairholders had made a public appearance on the same stage. While the media was hoping for clues on the Fed rate hike, the four leaders stuck to discussing their own views and philosophies in running the Fed. This meeting offered audiences a glimpse of what the Fed organization stood for, and how its philosophies have changed since 1979. 

Princeton University economist Alan Blinder said, “from these four people, you may experience some changes since Volcker took office. It may be very interesting that enormous changes have taken place within the Fed.” Blinder served as Fed vice chairman in the mid-1990s. 

When Volcker took over the Fed in August 1979, he declared war on the high postwar inflation rate. He changed the interest rate to 20%, which caused the unemployment rate rise to its highest level since the 1930s. Desperately short of credit, farmers used tractors to block roads in Washington to protest Volcker’s policies. The result of Volcker’s radical approach was that the inflation rate fell to its lowest point within 20 years.

In his 19-year tenure, Greenspan guided the Federal Reserve through a series of economic crises. The first was the Savings and Loans Crisis of 1987, just after he took office. The next major crisis was after the terrorist attacks on September 11, 2001. Greenspan cut interest rates and pumped money into the economy. Some economists argue that Greenspan continued to hold interest rates low for too long, allowing banks to engage in excessive lending and risk taking activities in the real-estate market that lead to the 2008 crisis.

After the collapse of Lehman Brothers in 2008, Bernanke guided the US economy out of the worst recession since the Great Depression. Cutting interest rates to zero, Bernanke was forced to resort to other policy instruments such as quantitative easing. The Fed has also become more communicative and more transparent with its decision-making process. When Bernanke finished his term in 2014, economic growth, inflation and unemployment were gradually improving.

Although Yellen took office well after 2008, her challenge is also difficult. Economists are concerned that rapid increases borrowing costs will curb the economic recovery, and Yellen must find a way to raise interest rates without bringing the economy backward. 

At the event, one major topic was how to deal with the current predicament of the US economy, and the four chairs drew insight from their own experiences with the economy’s ups and downs. Yellen said that the economy is not in a lending bubble, and that she believed raising interest rates over time would work. Bernanke was concerned with how the state of the world economy would affect the US, but said that “the Fed is not out of ammunition”, or monetary policy options, to deal with any issues that arise. Both Bernanke and Greenspan agreed, however, that the largest issue in the US economy was productivity. Greenspan stated, “unless we come to terms with the issue of productivity, then we have no major advance in the future.” On the other hand, Volcker seemed less concerned, mentioning that economic recessions have been occurring well before the Fed existed, and the cyclical nature of the economy is inevitable.