Janet Yellen: Why Trump Should Be Cautious


Sep. 30 2019, Updated 9:59 a.m. ET

On September 27, Janet Yellen expressed her concerns about the Fed’s estimated growth rate. She was the Fed governor between 2014 and 2018. As cited in a CNBC report, she said, “the economy seems less dynamic than it used to be.” President Trump is optimistic about the US economic growth rate. He also thinks that the trade war hasn’t impacted the US economy. Early in 2019, in an interview with CNBC, Yellen said that she expects solid growth in 2019. The first-quarter GDP increased 3.1%. The growth rate moderated to 2% in the second quarter. 

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Janet Yellen thinks the growth rate projection is too high

Janet Yellen said that the Fed’s median estimate of a 1.9% long-term growth rate is very optimistic. Demographics, education, and productivity are three important factors that could impact US economic growth, according to Yellen. Subdued growth in the labor force is an important demographic factor that will impact the future growth rate. The labor growth rate is 0.5%. The decreasing population, rising aging population, and lower immigration could impact the growth rate

On education, she said, “Improvements in average educational attainment of the labor force also boost economic growth.” However, she also said, “That’s continuing to rise, but it’s not rising … as rapidly as it used to.” Janet Yellen expressed her concerns about the lower productivity rate. Between 2007 and 2018, the productivity change in the non-farm business sector was 1.3%—compared to 2.7% in the past eight years. Similarly, the productivity change in the manufacturing sector was at 0.7% between 2007 and 2018. Between 2000 and 2007, the figure was at 4.3%.

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In 2019, the S&P 500 Index has risen 18.1%. The equity index was an outperformer among the top five economies. However, if the US growth rate starts slowing, it could impact consumer cyclical stocks like Apple (AAPL) and General Motors (GM). On a year-to-date basis, Apple and General Motors’ stock prices have risen 38.7% and 11.9%.

Fed’s rate cut

On July 28, Janet Yellen supported the Fed’s decision to reduce interest rates by 25 basis points. She said, “The United States isn’t an island. We’re part of the global economy.” What happens in the rest of the world — in Europe, in Asia — affects the United States.” The uncertainty around trade policy is impacting business investment decisions across the globe. Fed Chair Jerome Powell has similar views. Two days later, the Fed reduced interest rates by 25 basis points. Notably, the reduction was the Fed’s first rate cut since late 2008.

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However, Noble Laureate Robert Shiller disagreed with the Fed’s decision to reduce interest rates so early. He thought that the Fed should have increased interest rates by another 25 basis points at least once. The unemployment rate is near decade lows, which cushions the Fed to increase interest rates.

What do experts think?

On September 19, at the Delivering Alpha Conference, Emmanuel Roman, Pimco’s CEO, said, “We see the U.S. economy slowing down.” Pimco has $1.8 trillion in assets under management. He also said that the US growth rate will slow to 1% in the first half of 2020. Despite stronger consumers, the recession in the capex and manufacturing sector will hit the US growth rate. Based on his views, things will get worse if the US-China trade war continues.

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In an interview with CNBC on September 19, David Rosenberg, Gluskin Sheff’s chief economist, said, “There’s a recession coming in the next 12 months.” He also said that the economy is slowing and “earnings are actually contracting.” On August 6, Barclays analysts warned about an “industrial recession.” Notably, 33% of industrial stocks’ revenues under its coverage fell in the last quarter.

Janet Yellen thinks the Fed should be independent

Early in 2019, Janet Yellen told CNBC that the Fed should be independent. On September 18, President Donald Trump tweeted, “Jay Powell and the Federal Reserve Fail Again. No ‘guts,’ no sense, no vision! A terrible communicator!” On the same day, the Fed eased interest rates by 25 basis points. However, the market and President Trump expected a higher rate cut. Previously, President Trump wanted negative interest rates.


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