Janet Yellen to the Treasury

On 23 November 2020 it emerged that Janet Yellen, former chair of the Federal Reserve, would be Treasury Secretary in the new US administration. An economist very well known to the markets moved from running the central bank to being in charge of fiscal policy, that is, the taxes and public spending of the world’s largest economy. The change of profile, from central banker to Treasury head, aroused particular interest.

The appointment of the person who runs economic policy is one of the first signals of what can be expected from a government. That is why markets and analysts follow it closely: not so much because of the person, but because of what their track record suggests about priorities, management style and coordination with other institutions. For anyone with financial interests tied to the United States, the information was relevant. But it is worth distinguishing between information and recommendation: no appointment obliges anyone to change a well-thought-out plan.

Who Yellen is

Janet Yellen had chaired the Federal Reserve, the US central bank. On 23 November it emerged that she would be Treasury Secretary in the new US administration, the post that runs fiscal policy, that is, public taxes and spending. An economist well known to the markets thus moved from monetary to fiscal policy.

It is worth distinguishing the two kinds of policy. Monetary policy is handled by the central bank and acts on interest rates and the quantity of money; fiscal policy is decided by the government and acts on taxes and spending. When the same person has known both from the inside, they are assumed to understand well how they interact, something especially valuable at a time when both were moving with intensity. Both were, at that moment, central to the response to the crisis.

How markets read it

Markets read it as a sign of more fiscal stimulus and good coordination with the central bank. When government and central bank pull in the same direction, the effect on the economy is stronger. Yellen’s previous experience at the Federal Reserve suggested that this coordination would be smooth.

Markets, however, rest on expectations, and expectations may not be met. An appointment does not guarantee a particular policy: that will depend on what is decided and on what the legislature approves. It is therefore prudent to treat this kind of interpretation as a reasonable hypothesis and not as a certainty, and to avoid important financial decisions based only on it. Analysts may disagree, and reality is usually more nuanced than the first reading.

What came next

In 2021 that stimulus would arrive, and with it, inflation. It is a reminder that expansionary policies have side effects that come with a delay. For anyone with variable-rate debts, savings on deposit or investments sensitive to interest rates, it is worth understanding how their situation would change if prices and rates moved differently from expected. The point is not to anticipate the future, but to know how much room one has if it changes.

A practical exercise is to ask three things: how much the instalments on debts would rise if rates increased, how much purchasing power savings would lose if prices rose by more than their return, and which investments depend on rates staying low. The answers help to detect weak points and to talk to the adviser about possible adjustments, without having to guess the future. If there are variable-rate debts, it is worth knowing what alternatives exist to fix part of the cost.

Appointments in economic policy say a lot about what is to come.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.