First, congratulations to Janet Yellen for becoming the first woman chair of the Federal Reserve system. Now comes the hard part…
Yellen has spoken out that she will favor full employment policies along with the low inflation agenda that the Fed has followed since the 70’s. I wholeheartedly endorse such a move, but the main question is what happens when those two agendas come into conflict? And I believe they will, if she is successful in implementing them.
So a series of questions for debate:
- How do you think she will be as Chair?
- How much will she be able to implement policies to achieve full employment? (For the sake of argument, define it as getting unemployment down to >5% with the majority being frictional, and not structural.)
- What policies do you expect to see?
- When full employment threatens to lead to higher inflation, what level would be acceptable?
- How much will her appointment affect the market and the greater economy?
My preliminary opinions:
- She has the academic skills and expertise to be as good as any previous Chair, but I know nothing of her political abilities other than achieving the nomination after Summers had to withdraw (so grateful for that!), and I think that reflects more on Obama and others than on herself.
- I think she will have a difficult time at first getting the rest of the Fed Reserve Board to agree, but I think they see the wind changing. Inflation has not been a real issue for most Americans compared to the effects of unemployment and underemployment.
- In regards to full employment, I think the Fed has limited ability compared to other agencies. Increasing business startups or expanding existing businesses falls more to the SBA and other Commerce programs. I am still looking at policy specifics, and looking forward to what others have to say. Structural unemployment is the larger reason, and the Fed is limited to what they can do there. That depends on worker retraining programs and educational policies.
- Inflation has mostly been tamed, but the pressure is still there. The main drivers have been energy and food, the least elastic commodities that people buy. Other goods have gotten extremely cheap with major increases in added value. The average PC, TV, or car are not comparable to those twenty years ago, and pure science fiction to what existed in 1980 when we needed to stop inflation at any cost. But that cost has been paid. I think we could tolerate 3 to 4% nominal inflation as long as real growth is higher. 0-1% inflation with 2-3% growth is great for the millionaires and above, but insufficient for those at the bottom.
- I think the market knew this was coming since she was nominated. Any changes will be gradual rather than drastic. Some corporate CEOs and hedge fund managers may complain about the shift in policy, but most state and local governments will welcome it. California would definitely love to pay less unemployment benefits because people are working, not because the benefits were cut.
So that should be enough to start.