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.