White smoke drifting up from the Sistine Chapel means we have a new pope. Maybe a flight of white doves ascending from the White House could mean President Obama has chosen Janet Yellen to replace Ben Bernanke as Fed chairman. Certainly the perception on Wall Street and among newspaper headline writers is that Yellen worries a lot more — maybe too much — about the employment bit of the central bank’s dual mandate than the inflation part. This analysis of Fed policymakers from JPMorgan is typical:
Below is our updated hawk-dove chart. … Janet Yellen, as well as the two other most-often-mentioned contenders [to replace Bernanke], Don Kohn and Roger Ferguson, have demonstrated an aptitude to work within the bank’s unique culture. Even so, we do think Yellen’s policy inclinations are tilted toward ameliorating the underemployment situation and will likely remain so for some time to come, and so we left her at the dovish side of the chart.
But a deeper dive suggests Yellen’s reputation is perhaps overblown. AEI’s Stephen Oliner, a former Fed economist, analyzed 42 speeches Yellen has given over the past five years, focusing on her comments on inflation. His 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.”
For instance, last April Yellen said the following:
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 [the Fed's] 2 percent [target]” the Fed’s target rate of inflation.
But with unemployment elevated and inflation below target, this statement merely recognizes the Fed’s dual mandate. And note here use of the word “temporary.” As Oliner points out, Yellen has clearly stated the importance of not sacrificing the central banks inflation-fighting reputation. Yellen in 2001
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.
The Atlantic’s Matthew O’Brien nicely summarizes Yellenism:
She’s no friend of high inflation, but she understands that inflation can be too low as well. She’s a hawk when the time calls for it, and a dove when the time calls for that too. And that’s what we need more than anything else. Someone who’s willing to change their mind when the facts change — but makes sure the facts really have changed before they do so.
Again, inflation might everywhere and always be a monetary phenomenon, but it isn’t everywhere and always a pressing problem. Like right now.