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Press reports suggest that President Obama could soon announce his nominee to replace Ben Bernanke as the Chair of the Federal Reserve. Larry Summers, the Harvard professor and former Treasury Secretary with strong ties to the Obama administration, appears to be the favorite over Janet Yellen, the current Fed Vice Chair. The choice between the two has dominated headlines for months, with many articles and op-eds on the perceived merits and shortcomings of the two candidates. Before the choice is made, let’s take a close look at one of the main knocks on Yellen – that she may be too willing to let inflation rise in an effort to reduce unemployment. The charge that she’s soft on inflation has been repeated so many times that it’s now taken as fact.
If this claim were true, you’d expect to find supporting evidence in Yellen’s many speeches as President of the San Francisco Fed and then as the Fed Vice Chair. These speeches provide a substantial public record of her views. To assess whether the concerns have merit, I read the 42 speeches she has given over the past five years, focusing on her comments on inflation. This reading leads to only one conclusion: Yellen is not soft on inflation. Those who believe otherwise either haven’t done their homework, have misread the evidence, or are willfully misrepresenting her views.
Let’s start with the speech that could be read as most favorable to the argument that she isn’t sufficiently concerned about inflation. In a speech delivered on April 4 of this year, Yellen said: “With unemployment so far from its longer-run normal level, I believe progress on reducing unemployment should take center stage for the FOMC, even if maintaining that progress might result in inflation slightly and temporarily exceeding 2 percent,” the Fed’s target rate of inflation. This sentiment is entirely in line with the FOMC’s statement of longer-run monetary policy goals and strategy that was adopted in January 2012 and reaffirmed in January of this year. All of the inflation hawks on the FOMC approved this statement, which recognizes that circumstances may arise in which the committee has to balance the attainment of its inflation target against the objective of keeping employment near its maximum sustainable level. Yellen’s April 4 speech and the FOMC’s strategy statement are nothing more than a recognition of the Fed’s dual mandate.
The quote from that speech also makes clear that Yellen would accept only a slight and temporary rise in inflation above the 2 percent target, not more than that. Yellen is expressing the shared conviction of all FOMC members that the Fed cannot jeopardize its credibility as a low-inflation central bank. As evidence of Yellen’s aversion to high inflation, consider the following statement from a speech delivered on April 11, 2011: “The FOMC is determined to ensure that we never again repeat the experience of the late 1960s and 1970s, when the Federal Reserve did not respond forcefully enough to rising inflation and allowed longer-term inflation expectations to drift upward.” Consider, as well, this quote from September 4, 2008, which was a comment on large prior increases in commodity prices: “… it is clear we must keep a close eye on both inflation and inflation expectations to ensure that we continue to earn the inflation credibility that we have built up over the past two and a half decades.”
Two other speeches, delivered on April 11 and June 6 of last year, also deserve comment. Both speeches contained a lengthy discussion of why Yellen felt it was appropriate for the FOMC to keep the federal funds rate close to zero until 2015, a highly accommodative policy relative to standard prescriptions such as the Taylor Rule. In the models she discussed, leaving the funds rate near zero until 2015 delivered a notably faster transition to full employment than the Taylor Rule, along with higher inflation. Superficially, this outcome could appear consistent with the charge that Yellen is soft on inflation. However, that’s not the right conclusion from the speech. The projected inflation rate under the accommodative policy topped out at less than 2½ percent, only a shade above the Fed’s target, while the inflation rate under the Taylor rule was slightly below target. Yellen favored the accommodative policy because the unemployment rate was projected to fall more quickly while the inflation rate remained close to target. Nothing in the speech suggests that she would have been comfortable with a trade-off that involved a higher rate of inflation.
Yellen’s policy stance has been consistently dovish in recent years because she sees an economy with a stubbornly weak labor market and subdued inflation. Her forecasts, as it turns out, have been more accurate than those of the FOMC’s hawks, who have been looking for higher inflation around every corner. If her outlook for the economy were different, her policy recommendations would be as well. As she noted in a speech four years ago (September 14, 2009): “I can assure you that we will be ready, willing, and able to tighten policy when it’s necessary to maintain price stability. But, until that time comes, we need to defend our price stability goal on the low side and promote full employment.”
President Obama has the right to nominate the candidate he prefers, and that increasingly appears to be Larry Summers. But he should evaluate the candidates based on accurate information. Mr. President, don’t pass over Yellen because you think she could be soft on inflation. That’s a canard.
Stephen Oliner is a resident scholar at the American Enterprise Institute and a senior fellow at the UCLA Ziman Center for Real Estate. He was formerly an associate director in the Division of Research and Statistics at the Board of Governors of the Federal Reserve System.
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