Where does Yellen get these crazy ideas?

Maybe from her Phillips Curve upbringing. In her Congressional Testimony today, she said:

The U.S. economy is “performing well” and could justify an interest rate hike in December, Federal Reserve Chair Janet Yellen told Congress on Wednesday.

“I see underutilization of labor resources as having diminished significantly,” Yellen said, with inflation expected to rise over the medium term.

The Fed is “expecting the economy will continue to grow at a pace to return inflation to our target over the medium term,” she said. “If the incoming information supports that expectation … December would be a live possibility” for a rate increase, Yellen added.

As James Alexander wrote recently:

The central banks seem to define inflation as inflation two years out, that is, expected inflation based on their own “official” expectations. And, therefore, central bankers are on target with their own targets.

While she expects inflation to rise over the medium term, market based inflation expectations have fallen significantly since July.

Yellen Crazy Ideas_1
Neither does history provide evidence for her “wishes”. The chart shows nominal and real growth and inflation over a five year period following the 1990/91, 2001 and 2008/09 recessions!

Yellen Crazy Ideas_2

4 thoughts on “Where does Yellen get these crazy ideas?

    • The nature of the error is the same, but the motivation is different. In her case it´s about her ingrained P-C mindset, which sees “tight” labor markets and growth as inflationary. In the case of Sweden it was about asset bubbles.

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