Yellen Will Confront a Cooling Economic Recovery, Uncertain Stimulus Prospects

WASHINGTON -- Janet Yellen, President-elect Joe Biden's nominee to be Treasury secretary, will confront an economic recovery that appears to be losing momentum and uncertain prospects for additional stimulus from Congress.

If confirmed by the Senate, Ms. Yellen would play a key role pushing for more aid for an economy battered by the coronavirus pandemic and related shutdowns, especially if Congress is unable to reach an agreement on a relief package before Mr. Biden takes office on Jan. 20.

The rebound that began over the summer is showing signs of faltering as new virus cases surge and job growth slows, and much of the aid lawmakers passed earlier this year has run out. JPMorgan Chase & Co. economists said last week they expect the economy to shrink in the first quarter of 2021.

Ms. Yellen, a former Federal Reserve chair, will have to forge broad consensus on economic policy and sell ideas within the administration, on Capitol Hill and among the general public, said Tony Fratto, a Treasury official in the George W. Bush administration.

"Right now, we live in a country where people look at the same set of facts and come to diametrically opposite conclusions, so that is a big challenge for anybody who takes that job, to build support for your policy outcomes," he said.

Congress came together swiftly in the early months of the pandemic to pass a series of emergency aid bills totaling $3.3 trillion, including one-time stimulus payments for households, enhanced jobless benefits, loans for small businesses and vaccine research.

Lawmakers have since been split over how much more support the economy needs. Senate Republicans, concerned about record budget deficits, have proposed a $650 billion package aimed at hard-hit businesses, including restaurants and airlines. Democrats have pushed for a $2.2 trillion measure that includes aid for state and local governments, jobless workers and a national virus testing strategy.

Ms. Yellen has said that pulling back on spending too abruptly could lead to a slow recovery, like the one that followed the 2007-09 recession. As long as interest rates and inflation are low, there is little downside to borrowing more to help return the economy to its pre-pandemic health, she has said.

Ms. Yellen, 74, served as a Fed governor from 1994 to 1997 and did a stint as chairwoman of the White House Council of Economic Advisers in the late 1990s. She was president of the San Francisco Fed from 2004 to 2010 and served as Fed vice chair from 2010 to 2014, alongside then-Chairman Ben Bernanke. President Obama picked her to lead the Fed from 2014 to 2018.

"There is no one with more experience to help pull the economy out of the ditch," Sen. Ron Wyden of Oregon, the top Democrat on the Finance Committee, said in a statement Monday.

One of her first decisions could be whether to revive several emergency lending facilities the Treasury established this year with the Fed to help backstop credit markets.

Steven Mnuchin, Mr. Trump's Treasury secretary, said last week the programs would expire at the end of the year, despite objections by the Fed. The Biden administration transition team criticized the decision.

Fiscal and monetary policy coordination could become even more important in an era where short-term interest rates are pinned near zero, depriving the Fed of a key tool, said Mark Sobel, a former deputy assistant Treasury secretary for international monetary and financial policy.

"This will put a premium on the quiet conversations that go on between the Fed and the Treasury," Mr. Sobel said.

Ms. Yellen was on the other side of those conversations as Fed chairwoman, when she met regularly for breakfast with then-Treasury Secretary Jack Lew and later with Mr. Mnuchin, who has kept up the tradition with Jerome Powell, the current chairman.

Ms. Yellen will also play an important role helping to strengthen relations with U.S. economic partners around the globe. One major issue will be how best to engage with China, the world's No. 2 economy, Mr. Sobel said.

Larry Summers, who served as Treasury secretary during the Clinton administration, has said the Biden Treasury should emphasize international engagement and help coordinate a global response to the economic crisis, including seeking commitments from countries to stimulate demand, provide new support for emerging markets and avoid protectionist measures.

"The next secretary's legacy is likely to lie more in the international arena than anywhere else," he said in a recent discussion with the Peterson Institute for International Economics.

Ms. Yellen will also oversee international sanctions, financial regulation and management of the $21 trillion national debt. She will be at the center of decisions on the future of mortgage giants Fannie Mae and Freddie Mac and how to incorporate combating climate change into the financial regulatory framework.

Unless Democrats can take control of the Senate by winning two January runoffs in Georgia, the Biden administration is unlikely to win congressional approval for its plan to raise taxes on corporations and the wealthy.

Still, Democrats expect the Treasury to revisit many of the Trump administration rules that implemented the 2017 tax cuts. That could mean reversing regulations that let some multinational companies lower their U.S. taxes on foreign income.

On enforcement, the Treasury can push for the Internal Revenue Service to focus more on businesses and wealthy people and less on low-income recipients of the earned-income tax credit. But those more complex audits require more and better-trained IRS employees, and the Biden administration's ability to make that happen is limited without sustained funding from Congress.

Richard Rubin contributed to this article.

Write to Kate Davidson at kate.davidson@wsj.com

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  11-24-20 0614ET
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