A Benjamin Cole post
February 11, 2016, Washington, D.C.—Defiantly defending the U.S. Federal Reserve’s 3% inflation floor, Fed Chair Janet Yellen’s swatted away questions from U.S. Senators who said lower rates of inflation could be obtained safely.
The “public and representatives have embraced thickets of structural impediments to growth,” retorted Yellen. “For the economy to scrape through to minimally acceptable rates of GDP growth requires a bedrock of 3% inflation. Below that floor threatens stall speed, and financial instability.”
Yellen noted “the joke is that it takes an Act of Congress to get housing built in many cities of America—and that is what I am saying: Congress has to turn some screws to boost housing production is key metropolitan regions.” Without that, asserted Yellen, housing inflation will also boost general inflation numbers, even in a slack economy.
The Fed Chair tried to unruffle Senatorial feathers by pointing out that many structural impediments are state and local government sacred cows, such as property zoning, occupational licensing, and the near-universal criminalization of push-cart vending.
“But I have to tell this body that many federal structural impediments, be they rural subsidies and the USDA, or the SSDA and VA disability programs, the minimum wage, the ethanol fuel program, or the $1 trillion in annual national security outlays, are impediments to a freer economy that could grow more rapidly at lower rates of inflation,” Yellen explained. “The real path to lower rates of inflation lies in Congress.”
Yellen again tried to smooth matters with Senators by reminding them of the “bad old days” when the U.S. was characterized by unionization, limited foreign trade, and regulated rates in transportation, including trucking, airlines and railroads. “Back then Chairman Paul Volcker accepted a 5% rate of inflation,” reminded Yellen, speaking of the 1980s Fed Chief. “And you know what Vocker thought of inflation.”
In conclusion, Yellen pointed the economic struggles in Japan and Europe, two economies that have sunk into persistent deflation and slow growth. “It may be ungracious of me to say so, but it was only the Fed’s decision in 2008 to target and forcefully obtain rates of inflation well above 3% that kept us from sinking into the deflationary stalls we have seen since in Europe and Japan,” said Yellen. “The $7 trillion of QE was controversial but effective; the resolve and credibility of the Fed was affirmed; and we have never looked back.”