Scott Sumner  


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Politico has a new piece discussing the "tragedy" of Janet Yellen not being reappointed as chair of the Fed:

In December 2012, a new Federal Reserve governor and unseasoned monetary policymaker, Jerome Powell, told his colleagues that the risks of continued stimulus likely outweighed the benefits. Vice Chair Janet Yellen, even then one of the most experienced policymakers in the Fed's 104-year history, acknowledged the concerns but pushed back forcefully. She argued that "slow progress in moving the economy back toward full employment will not only impose immense costs on American families and the economy at large, but may also do permanent damage to the labor market."

. . .

Here's the tragedy: As Scott Sumner of the conservative Mercatus Center put it recently, "Yellen is on a glide path to near perfection, as she will probably end her term achieving the Fed's dual mandate better than any other chair in history." And yet she is the first chair in modern Fed history not to be renominated after serving a full first term. Her predecessors served at least twice as long--Paul Volcker and Ben Bernanke for eight years and Alan Greenspan for 18--and each was reappointed by a president of the opposite party.

How can I argue that monetary policy is currently near optimal? Hasn't the Fed undershot its inflation target for years?

Some Fed critics forget that they have a dual mandate. The Fed interprets this mandate as keeping inflation close to 2% and unemployment close to the natural rate, which the Fed now estimates is about 4.6%.

It's not always possible to hit both targets at the same time. In that case, if policy is a bit too expansionary for one target, it should be a bit too contractionary for the other. (This is the idea behind the Taylor Rule.) And that perfectly describes today's economy. Policy in 2017 was a bit too expansionary for the 4.6% unemployment target and a bit too contractionary for the 2.0% PCE inflation target. In other words, policy was near perfect.

That's not to say that Janet Yellen deserves all the credit; I suspect if Bernanke had stayed on we'd be in roughly the same place. The Fed is a large institution, where no single person calls the shots. But if we are judging people on performance, then it's hard not to conclude that Yellen's performance was near perfect, at least in her final year at the Fed.

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P.S. This does not mean that the Fed has the appropriate policy regime. That's a completely different issue. I favor NGDPLT, using market forecasts to guide policy. That regime is still far away, and hence there's much more work to be done.

HT: Anthony McNease

Comments and Sharing

COMMENTS (9 to date)
Gabriel Weil writes:

One would normally think of there being a tradeoff that might require tolerating either above-target unemployment or above-target inflation in order to get the other number down to target. Here, you're saying Yellen/the Fed's policy tolerates below-target inflation in order to get unemployment UP to target. This seems crazy. What are the supposed bad effects of unemployment BELOW 4.6%, other than inflation? The most parsimonious way to make sense of current policy is that the FED has a preference for lower inflation (even below 2%, though perhaps not below (1.5% or 1%) and so sees it as a positive benefit that it can get inflation below 2% while also keep unemployment below target. This doesn't mean current policy is very far from optimal, but it seems really weird to defend below-target inflation (which by assumption is something to be avoided, though it's not clear Fed officials would agree) by saying it's required in order to RAISE unemployment closer to target.

George Selgin writes:

Your defense of Yellen would be more plausible, Scott, if Yellen herself had argued similarly, instead of calling below-target inflation a mystery!

Scott Sumner writes:

George, Remember, I am not defending her overall approach. She uses the Phillips Curve to forecast, which implies that she expects procyclical inflation. But the Fed's dual mandate implicitly calls for countercyclical inflation.

The current regime will not work well in the next crisis.

But at the moment, policy is near ideal, using the Fed's own targets.

Antischiff writes:

Dr. Sumner,

I'm surprised you are not critical of the Fed using an estimate of the natural rate of unemployment to help guide policy. My impression is that no one can reliably say what the natural rate is, if there is one (and if there is one, what is the dynamism?).

Given that we are already below 4.6% unemployment, with inflation well in check, even given forward indicators, why not be critical?

Hans writes:

Should there not be a tri-mandate of
economic growth at or over 3% ??

How is it possible to "mandate" inflation
and unemployment rates ??

Hans writes:

"Federal Reserve Chair Janet Yellen recently predicted that, thanks to the regulations implemented after the 2008 market meltdown, America would not experience another economic crisis “in our lifetimes.”

This is a stunning and incomprehensible
statement, unless she was referring to only

It is a fright that there are "Conservatives"
whom are fully supportive of central planners
and their machinery.

Scott Sumner writes:

Gabriel, Of course I don't favor targeting unemployment, but if you do so then the target must be symmetrical.
Otherwise it will be destabilizing, making the business cycle more volatile. If you are targeting the natural rate of unemployment, then there is nothing "crazy" about trying to raise it when it is below the natural rate. That's what it means to target a variable

Antischiff, I did suggest that I don't approve of targeting unemployment, in my postscript.

Thaomas writes:

I take a less rosy view of Yellen (and Bernanke) although either would have been better than Powell. They failed to show tha in a future recession the Fed would not again allow arbitrarily large downward deviations from the average inflation (=PL) target. Stimulus, by whatever means, should have continued until the price level returned to it's pre-crisis trend level.

Sean DiTullio writes:

Janet Yellen is fantastic. I don't like her as a FED chair because she is boring and bad for a person like me (trader); and has created low volatility.

But she has been fantastic for the real economy

The only real mistake was taking 10 years to get here...but I blame that on institutional factors preventing her from being more aggressive.

That being said I've been impressed with Powell's speaches. I do not think he is as good as Yellen, but I do think he's learned a lot from her. I know you think the FED should be stocked with monetary policy experts....but two of the best on the board right now - kashkari and powell were outsiders. Perhaps that has made them more open-minded on considering new ideas.


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