By Scott Sumner
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.
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