Janet Yellen can hold her own, as many unwitting congressmen and senators have found out when trying to politicise congressional sessions involving the US’s top central banker.
However, Yellen normally is careful to avoid politicising her role as Fed chair, which made last week’s session, the first since Donald Trump’s victory in the presidential election, particularly notable.
The session was a warning shot directed at the president-elect, a fierce statement on the independence of the Federal Reserve and a staunch defence of the regulatory reform the Fed has helped enact since the financial crisis.
Yellen also made it clear that she could not envision any scenario where she would step down before her term ends in 2018.
The hearing would likely have been received badly in the gilded halls of Trump Tower, where the president-elect is preparing his transition team to take office in January.
Donald Trump was a vocal critic of the Federal Reserve and its chair over the course of the campaign.
In the first debate he said that Yellen was being “more political than Secretary Clinton” in laying out the Fed’s monetary policy. He then stated in an interview with CNBC that Yellen should be ashamed of herself for keeping rates low and promoting an overinflated stock market.
This plays to a wing of the Republican Party which has increasingly become hostile to the US Central Bank, led by Senator Rand Paul (R-Ky). Senator Paul and the anti-Fed wing have now laid out plans to audit the Fed.
Trump said he supports such a move and will almost certainly want to keep Paul on side, given the slim Republican Senate majority. Any move forward in that process would severely limit the central bank’s independence and change the nature of the US economy.
Fed officials have reacted negatively to any speculation over an encroachment on the central bank’s independence.
Following Yellen’s testimony her number two at the Fed reiterated the point on Monday.
In an interview with CNN, Fed vice-chair Stanley Fischer also made clear that an independent central bank was a “very important” aspect of the US economy.
James Bullard, chief executive officer and president of the Federal Reserve Bank of St Louis, has also come out in support of the Federal Bank’s independence.
Despite this opposition, Trump could immediately press his agenda forward, and change the composition of the board on day one of his administration.
There are two vacant seats on the board which Trump will now have the ability to fill, and he will also be able to replace Fischer and Yellen in 2018.
Goldman Sachs economist Zach Pandl wrote before the election that the next president would have an unusual degree of influence over the future composition of the Fed’s committee and Trump must now choose what direction he takes with regard to the institution.
While no central bank should be above criticism, Trump’s anti-Fed utterances on the campaign trail went too far.
As was recently seen in the UK when Conservative Party ideologues rounded on Mark Carney, politicians grandstanding against a central bank creates nothing but economic uncertainty.
A battle between Trump and Yellen would make that episode look like a minor footnote, given the influence the Fed has on central banks and economies around the world.
Yellen was also right when she said during her testimony that there is a history of “terrible outcomes” when politicians try to influence monetary policy and the new administration should be treating the Fed as an ally, rather than as an adversary.
Accommodative monetary policy may actually be a benefit to President Trump, if he really wants to follow through on his stimulus programme. A dovish Fed could also continue to make the economy look good under his administration, which is what he accuses it of doing for President Obama.
But if, however, he chooses to pick a fight with the world’s most powerful central bank, then the most immediate conflict victims will be the US economy, capital markets and the economically marginalised voters Trump professes to be trying to help.