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Home Publications Blogs Beat the Press Did Janet Yellen Argue With Greenspan for Higher or Lower Interest Rates?

Did Janet Yellen Argue With Greenspan for Higher or Lower Interest Rates?

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Thursday, 25 April 2013 04:33

There are often shades of grey in interpreting people's views, but the NYT seems to be giving us assessments of Federal Reserve Board Vice Chairman Janet Yellen's views that are 180 degrees apart. An article today on Dr. Yellen's prospects of being chosen to replace Ben Bernanke as chair tells readers:

"In July 1996, the Federal Reserve broke the metronomic routine of its closed-door policy-making meetings to hold an unusual debate. The Fed’s powerful chairman, Alan Greenspan, saw a chance for the first time in decades to drive annual inflation all the way down to zero, achieving the price stability he had long regarded as the central bank’s primary mission.

"But Janet L. Yellen, then a relatively new and little-known Fed governor, talked Mr. Greenspan to a standstill that day, arguing that a little inflation was a good thing."

Okay, this is pretty clear, Yellen is on the side of promoting growth at the risk of somewhat higher inflation.

This seems hard to reconcile with a piece the NYT wrote three years ago:

"Before the Fed’s policy-making arm met in September 1996, he [then Federal Reserve Board Governor Laurence Meyer] recalled, he and Ms. Yellen paid an unusual visit to Alan Greenspan, Mr. Bernanke’s predecessor.

"'Janet and I were both worried about inflation, even though it was very well contained at the time,' Mr. Meyer wrote in a blog post last month. 'We told the chairman that we loved him but could not remain at his side much longer if he continued, as he had been doing for some time, to push the next tightening action into the next meeting, and then not follow through.'

"Mr. Meyer and Ms. Yellen ultimately stood by Mr. Greenspan, who had correctly predicted that technological change was fueling a boom in productivity and alleviating inflationary pressures. The Fed did not raise its benchmark interest rate until the following March."

This seems pretty clear too, at almost the same time, Yellen along with Meyer is arguing for raising interest rates in order to stem inflation at the risk of slower growth. Greenspan is on the other side, arguing that there was no risk of inflation in the economy at the time. 

Other accounts, usually with Meyer as the source, have generally supported the view of Greenspan as the inflation dove, arguing that there was little risk of inflation at the time, even though the unemployment rate was well below the generally accepted range for the NAIRU (non-accelerating inflation rate of unemployment). On the other hand, Meyer and Yellen were upholding the economic orthodoxy, insisting that low unemployment posed a real risk of inflation that the Fed had to address, even if there was little basis for such concerns in the data at the time.

It might be worth someone's time investigating which of these accounts of Yellen's position at the time is accurate, but it does not make sense that she was both an inflation hawk and dove at the same time. She was either pushing for higher interest rates or for holding the line on interest rates to let unemployment fall, she was not doing both.

 

Addendum:

Binyamin Appelbaum, the reporter who wrote today's NYT piece, sent me a note of clarification. The exchange between Yellen and Greenspan to which he referred was over a long-run question: whether the Fed should be targeting zero inflation or a higher rate in the range of 2-3 percent. Yellen was arguing that zero was not a desirable target for the reasons mentioned in Appelbaum's piece. Moderate rates of inflation can make it easier for real wages to adjust and therefore sustain full employment.

On the other hand, Yellen and Greenspan had opposite assessments of the inflation situation at the time. Yellen felt that the relatively low unemployment rate meant that inflation posed an imminent threat and therefore a rise in interest rates was warranted. On the other hand Greenspan saw little risk from inflation and wanted to keep interest rates low.

These are entirely consistent positions. I appreciate this clarification.

Comments (5)Add Comment
Janet Yellen Solves the One-Hand-Other-Hand Dilemma
written by Last Mover, April 25, 2013 6:41
She was either pushing for higher interest rates or for holding the line on interest rates to let unemployment fall, she was not doing both.


Oh yes she was doing both. Finally an economist with only one hand has been found in order to collapse costs on the one hand and benefits on the other hand into a single unambiguous conclusion.

No more of that muddled double entendre talk from what-did-he-say Greenspan. From here on out it will be forthright clear policy stated with one hand.

Certainty reigns.
Low Interest Rates Are Inflationary?
written by Tyler Healey, April 25, 2013 8:53
Japan has had low interest rates for decades, and the result has been low inflation.

Low interest rates starve the economy of interest income. Furthermore, why should we encourage households to go deeper into debt?
...
written by skeptonomist, April 25, 2013 9:48
The debate would be less surreal if there were any evidence that central banks controlled inflation. There is none, and the idea that they could fine-tune inflation at 2% as opposed to 3% or attain zero if desired is simply nonsense. During the inflation of the 70's and 80's central banks raised short-term rates far higher than ever in history, and inflation never came near being controlled. The Fed was totally unable to control the growth of the money supply, although that was their declared objective for most of that time, and is supposed to be the main power of central banks. During the current slowdown the Fed has tried mightily to expand the money supply, but has succeeded only in bloating bank reserves.

Monetary policy advocates are reduced to calling on the magical powers of central banks to induce inflation by declaration; central banks are supposed to say that they will not act against inflation in the future and this is supposed not only to cause producers to increase prices, but workers to demand and obtain wage increases (if wages do not go up faster than prices, demand will be decreased). If induced inflation is supposed to increase demand, as Krugman recently claimed, the absurdity becomes obvious.

As I have been saying for some time, the declarations of a given central banker as to future policy are worth very little for several reasons, among which is the fact that those bankers are subject to replacement. Now people are starting to face up to the fact that Bernanke will be replaced in 2014 and policy could be very different under his successor. Why would the markets place confidence in Bernanke's declarations?

As I have been saying for some time, the declarations of a given central banker as to future policy are worth very little for several reasons, among which is the fact that those bankers are subject to replacement. Now people are starting to face up to the fact that Bernanke will be replaced in 2014 and policy could be very different under his successor. Why would the markets place confidence in Bernanke's declarations?
skepto...not just the banker...
written by pete, April 25, 2013 9:57
It is not just the individual, it is another issue called time inconsistency. This is the Bernanke nee Greenspan put. If monetary policy is linked to economic outcomes, rather than price or inflation stability, then there is an imbedded game that we can play with Mr. Fed, whoever they be. We know they will always bail us out. This game is best played by those with capital, hence the outsized returns to capital over the last 40 years, while labor has been effectively screwed. Even Marx warned against activist monetary policy, and that was before a central bank run by bankers was created in secret by JP Morgan at a faraway island....still not sure why liberals applaud the Fed.
Inflation above target is better
written by Edward Lambert, April 25, 2013 9:53
I wrote this today on my blog explained with a graph and data... "In other words, it would be better to have an inflation rate of 3% with an inflation target of 2%, than to have an inflation rate of 2% with an inflation target of 2%."

And now it is even worse that we have inflation below the target.

http://effectivedemand.typepad.com/ed/2013/04/some-dynamics-of-the-effective-demand-rule-for-the-fed-funds-rate.html

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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