Thursday, October 10, 2013

YELLEN | Perfect Choice for Fed

Janet Yellen, President Obama's
nominee for Fed Chair
The appointment of Janet Yellen is perfect because she is pragmatic, eyes on the data, and concerned about unemployment as well as inflation. She is not one of those central bankers who consider the unemployment problem to be a secondary concern.

Also, because she is a woman, we won't be hearing so many complaints about "100 years of patriarchy at the Fed".

While the Phillips Curve has given way in academic circles to the concept of a non-accelerating-inflation rate of unemployment (the NAIRU), the two desirables of low inflation and low unemployment remain the twin objectives of the Fed, with low inflation being the traditional central bank goal and a low-unemployment goal having been added by the Employment Act of 1946.

Inflation appears to be under control, so the "doves" on the Federal Open Market Committee believe that it is not yet time to "taper" the Quantitative Easing program that has been designed to encourage economic growth. The idea is to keep long-term interest rates low by providing a ready secondary market for long-term Treasuries, thereby lowering yields on all long-term instruments and providing inexpensive capital for job-creation.

In a fine interview a few hours ago on Charlie Rose, Professor Yellen emphasized that the Federal Reserve is working on behalf of all Americans. The implication of that is that containing inflation satisfies the concerns of those who hold debt, i.e., wealthier Americans. Unemployment, however, is more prevalent among poorer people and it creates poverty.

That, in a word, is why the doves tend to be liberal Democrats and the "inflation hawks" tend to be more banker-oriented. Yellen is close to Bernanke on this spectrum, but more dovish than Bernanke has appeared to be recently in his effort to preserve consensus.

The target rate for interest rates continues to be near the zero bound because inflation is coming in below the 2 percent target that Chairman Bernanke announced at the beginning of 2012. Right now 6.5 percent still appears to be the target unemployment rate, and we are not there yet, although we lack the September number because of the government shutdown. By the standards of the targets, based on the data, Janet Yellen is in the right place on the dove-hawk perch.

A few critics from the left note that she did not oppose the 1999 takedown of the Glass-Steagall Act, but then neither did Senator Schumer and other key Democrats. No one fully foresaw how things would play out through 2008. It was the London Economist that in 1999 observed correctly that if the investment banking (and other non-bank financial) foxes were allowed to mingle with the banks, the investment banks – or preferably the entire financial system including the investment banks – should be regulated. For more on this period, see this post from 2008.