There´s been a lot of “Yellen soul searching” lately. Gavyn Davis at the FT weighs in:
Ms Yellen is, of course, routinely described as one of the most dovish members of the FOMC and her speeches since moving to Washington as Vice Chair in 2010 have usually been one notch to the dovish side of Mr Bernanke himself. Recent speeches have established that she believes that interest rates should be held at zero for a longer period than would be implied by a normal Taylor Rule, even if inflation rises above 2 per cent for a while.
A devoted advocate of transparent communications, she firmly believes that the Fed should give explicit forward guidance about holding rates “lower for longer”, guidance which may need to be strengthened as the FOMC begins to taper its asset purchases. This could be her first task if tapering starts after she takes office in February.
On the precise date of tapering, Ms Yellen has offered five labour market tests which are usefully summarised in this brief paper by my colleague Juan Antolin-Diaz. Several of her indicators have improved somewhat since QE3 was launched, but not by enough to make early tapering an obvious decision. Furthermore, in her most recent major speech on monetary policy (on 4 March, 2013), she made it clear that she currently places more importance on maximising employment than on the inflation part of the Fed’s mandate:
With employment so far from its maximum level and with inflation running below the Committee’s 2 percent objective, I believe it’s appropriate for progress in the labor market to take center stage in the conduct of monetary policy.
Gavyn Davis´ conclusion:
The implication of this is important. If the Fed nominee is a dove, which she is, it is because she thinks that a rise in inflation is improbable, not because she thinks it would not matter. Like many Keynesians of her generation, the rise in inflation in the 1970s was a scarring experience for her. Her 2004 paper summarises her approach rather well:
Stabilisation policy can significantly reduce average levels of unemployment by providing stimulus to demand in circumstances where unemployment is high but underutilization of labor and capital does little to lower inflation. A monetary policy that vigorously fights high unemployment should, however, also be complemented by a policy that equally vigorously fights inflation when it rises above a modest target level.
The fact that Ms Yellen is a dove today does not imply that she would tolerate rising inflation tomorrow. She will need to persuade the markets, and the public, of that in the coming weeks.
is probably correct. But in 1996 Janet Yellen was a firm believer (like Laurence Meyer) in Phillips Curve macro. And she remains so today.
This is Yellen in the September 1996 FOMC meeting (pages 38-39), when contrary to Greenspan; several participants favored a rise in rates:
MS. YELLEN. Thank you, Mr. Chairman. I can support your proposal to adopt an unchanged policy with an asymmetric directive and to continue to evaluate incoming data as it bears both on the degree of momentum in demand and the inflationary pressures latent in the current environment. But I find myself very close to the margin and would also have been quite willing to support an upward adjustment of 25 basis points today, had you proposed that. I can support your proposal because, for the reasons that I outlined earlier and you explained in fascinating detail, this is an unusual episode. I believe we are still at quite an early stage of an inflationary uptick, if indeed this turns out to be one. I also agree that with demand moderating and current inflation stable or falling, we may end up deciding that it is unnecessary to move the funds rate upward.
But having said that, I believe that a very solid case can also be made for raising the federal funds rate at least modestly, by 25 basis points, on the grounds that the unemployment rate has notched down further, the decline in labor market slack is palpable, and the odds of a rise in the inflation rate have increased, whatever the level of the NAIRU and the associated level of those odds. I believe I am echoing Governor Meyer in saying that I favor a policy approach in which, absent clear contra-indications, our policy instrument would be routinely adjusted in response to changing pressures on resources and movements in actual inflation.
Which is the mirror image of what she said earlier this year!
Apparently the pressure on Greenspan to raise rates became so strong (from the outside even Krugman was ‘shouting’ that the Fed was ‘behind the curve’) that in the March 1997 meeting he ‘gave in’ and increased the FF rate by 25 basis points. And that was it. Enough to ‘shut everyone up’!
It certainly is not the time to go back in time and choose a ‘Phillips Curver’ to head the Fed. Bernanke suffered from inflation/deflation phobia and was guided by the “Creditism Gospel”. With that he missed badly on the nominal stability objective. With Yellen´s ‘Inflation-Unemployment” ‘map’ as guide the Fed is just giving itself another chance to ‘mess up’.
Update: And that´s exactly what transpired from the March/14 FOMC Meeting and in the follow-up press conference.