Yellen slips in new information

In Yellen´s Congressional appearence there were the wishful-thinking homilies:

“With the harsh winter behind us, many recent indicators suggest that a rebound in spending and production is already underway, putting the overall economy on track for solid growth in the current quarter,” Ms. Yellen told the Joint Economic Committee.

Should you believe her? I don´t. The charts show that after rebounding from the deep crash in aggregate nominal spending (NGDP), the Fed has “calibrated” spending growth at 4% since the end of 2010, no matter your favorite “metric” of growth. With that the growth rate of real output has settled down to an average growth of 2.2%, also in all metrics.


But the interesting thing was that during an exchange with Representative Richard Hanna she:

[S]trongly defended the Fed’s commitment to control inflation. She said the high inflation of the 1970s had been a formative experience for the entirety of the Fed’s leadership, and they were determined to keep inflation below the 2 percent annual pace the Fed has described as its target.

So, ignore the talk about ‘flexible inflation targeting’, ‘2% over the medium term’ or what have you. 2% is a ceiling!

As the chart shows, in that the Fed has been 100% successful! And notice the “learning process” that took place since 2007-08 when oil price increases were perceived as “extremely dangerous”.


PS “Formative experience” indeed!


6 thoughts on “Yellen slips in new information

  1. So the “real” inflation target is what? 1.6 percent? So Yellen has a stated policy average target of 2 percent but then an implied target around 1.5 percent? Is this transparency in government? Clarity? And then, would robust economic growth but 2 percent inflation be a policy failure?

  2. To be fair to Yellen I think the reporter has somewhat misinterpreted what she said. This Bloomberg transcript says:

    REPRESENTATIVE RICHARD HANNA (R-NY): Thank you very much. Thank you for being here. I want to follow up on something that Chairman Brady talked about briefly.
    Milton Friedman once said that inflation is always and everywhere, and today, we see that the United States Department of Agriculture estimates that food costs may go up as much as 3-1/2 percent this year, and that is the highest potential rate in the last, I think, three years. In this morning’s Wall Street Journal, Allan Meltzer, a distinguished Federal Reserve historian, writes: the Fed focuses far too much attention on distracting — on distracting monthly and quarterly data while ignoring the long-term effects of money growth.
    Beyond the pure inflationary concerns, he says some side effects of the Fed policies have ugly consequences. One of the worst is the ultra-low interest rates for retired persons to take — it forces them to take substantially greater risk than bank CDs and that many of them relied on in the past.
    He says that — goes on to say this ends usually in tears for a lot of people. And we see people that planned on a retirement and simply based on historic rates and they’re just not there for them anymore. Is maintaining an extraordinarily low interest rate for a decade creating market distortions that will have long-term effects on the economy? And you know, it’s nice to talk about being able to control inflation going forward and that you will respond to it and keep it below 2 percent. But you know, last year it was a percent- and-a-half.
    So can the Federal Reserve identify you think accurately a change in economic conditions and execute an exit strategy before inflation occurs since, as Mr. Brady said and Mr. Meltzer said, never any time in history of this country that financial big budget deficits with large amounts of central bank money avoided inflation?
    MS. YELLEN: Well, I do believe that we have the tools and absolutely the will and the determination to remove monetary accommodation at an appropriate time to avoid overshooting our inflation objective.
    The committee — everybody on the committee, a formative experience for them was the 1970s when we saw very high inflation and a huge effort by Chairman Volcker to tighten monetary policy to bring it down. We lived through a period in which Fed policy wasn’t sufficiently tight and high inflation led to a rise in inflation expectations. We saw that those inflation expectations could become a persistent source of high inflation and that it could be very costly to lower inflation.
    REP. HANNA: And of course —
    MS. YELLEN: The lessons from that period are very real for all of us and none of us want to make that mistake again. I do believe we have the tools and the determination to avoid — to avoid that. We indicate inflationary developments and inflationary expectations are part of our focus as we watch what the likely evolution of inflation is. And I can’t say, you know, that we will get it perfect but I can tell you that the committee has adopted a 2 percent inflation objective in order to make clear our commitment to achieving that objective and to be held accountable for it. And we’re determined to have that happen.
    REP. HANNA: And of course if we raise interest rates, our debt payments, our interest payments will exceed our national defense budget I think within eight or — seven or eight years. I think 2021 is the estimate. So all of that working together, we really need to grow our economy to afford — to be able to manage that.
    MS. YELLEN: We want to be able to and we expect as the economy recovers that a point will come when it will be appropriate to raise short-term interest rates. Long-term interest rates are likely to be rising over time as that occurs and this is something I think Congress should certainly be taking into account as you look at what fiscal burdens will be down the road.
    REP. HANNA: Thank you. My time’s expired.

    • James in London: Excellent clarification. Evidently, Yellen still adheres to a 2 percent inflation objective, althogh if she is sincere, then she has been badly undershooting her target for years. I mean, we have not been close to 3 percent in a al long time….

  3. They are all closet NGDP of 5%’ers, to a man and woman. 3% real plus 2% inflation. But to a man and woman they can’t see the perils of shooting for 2% above all else. The 3% is just exogenous to them, but we know it is actually partially endogenous.

    Why this is so is not so often explained by market monetarists, more needs to be done. It’s almost a microeconomic thing. You need all wages rising healthily to permit labour reallocation to its most productive uses, without general wage growth this doesn’t happen so well as those workers not so in demand are at risk of being laid off all the time rather than just losing some real income. At least that’s my understanding, happy to be disabused!

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