Scott Sumner has a post on Econlog discussing possible intentions for voting to maintain the Fed policy rate at 2% at the September 2008 FOMC meeting, the one meeting that has come to signify the Fed’s last chance to avoid the Great Recession in the MM blogosphere.
In that post, Sumner presents a quote from Yellen’s statement in the September 2008 transcripts and then a characterization of her statement by Keven Erdmann:
The quote from the post:
“Furthermore, we have seen a remarkable decline in inflation compensation for the next five years in the TIPS market. I would not rely heavily on this decline to support my view, but I do have to say that the decline is a lot more reassuring than the alternative. I was also encouraged by the 30 basis point drop in long-term inflation expectations in the most recent Michigan survey. I anticipate that the recent jump in the unemployment rate will place some additional downward pressure on growth in labor compensation, which has been quite low, and in core inflation.
Although the jump in the unemployment rate probably partly reflects the extension of unemployment insurance coverage, a back-of-the-envelope calculation suggests that the upper bound on this effect is just a few tenths of a percent.” (pg. 34)
The characterization by Erdmann:
Leaving aside the idea that in September 2008 the FOMC was reassured by a precipitous decline in inflation expectations, note that Yellen here was explicitly saying that the Fed should ere on the hawkish side because Emergency Unemployment Insurance was escalating the unemployment rate, and thus masking inflationary wage pressures. The Fed tightening in September 2008 included monetary offset based partly on their belief that EUI inflated the unemployment rate. Keep in mind EUI had only been in effect for less than 3 months, at much less generous terms than its eventual terminus, and the unemployment rate was only 6.1%. I assume that the Fed’s hawkish offset increased as unemployment rose and EUI terms became more generous.
And then Sumner arrives at this conclusion:
So Janet Yellen did not want to ease monetary policy, despite a worsening financial crisis, and despite an economy that was sliding into recession. (Unemployment had already risen by 1.6%, whereas any increase over 0.8% signals recession 100% of the time.) And despite inflation expectations being far below the Fed’s target. And one of the factors (certainly not the only one) that caused her to want to hold off was the perception that some of the increase in unemployment was lazy bums who don’t want to get off their butts and start working.
Here are the pertinent parts of the unemployment discussion from the September 2008 transcript page 34:
I anticipate that the recent jump in the unemployment rate will place some additional downward pressure on growth in labor compensation, which has been quite low, and in core inflation. Although the jump in the unemployment rate probably partly reflects the extension of unemployment insurance coverage, a back-of-the-envelope calculation suggests that the upper bound on this effect is just a few tenths of a percent. I would agree with the Greenbook estimates. We have also examined the possibility that the increase in unemployment reflects a rise in the NAIRU due to sectoral employment shifts out of construction and finance and into other industries. Ned Phelps has argued that the sectoral shift story implies a sizable dispersion of employment growth across industries and states. But we looked at these data and found no significant increase, so I don’t find this Phelps argument particularly convincing. Considering all of these factors, I expect both headline and core PCE price inflation to fall to about 2 percent for 2009 as a whole, and I see the risks to this projection as roughly balanced.
What I think about this, given the more detail dedicated to the NAIRU was that she believed factors other than monetary were impacting unemployment, and the characterization of the discussion in regard to intent is inaccurate.
It’s true that she supposed that the jump in unemployment would reduce inflation and that it already had as evidenced by TIPS. But, at least to me, it is clear that it was a choice to NOT offset the effects of UI extension and in consideration of shifts in the NAIRU in order to bring inflation back to target. She said she agreed with the Green Book, not that she thought TIPS are more accurate. In a policy world where only inflation matters as described in the WSJ article I pointed out here, my view of her intentions is consistent with the willingness to tolerate higher unemployment or drive it higher in order to bring inflation back to target.
We can argue the point about passing judgment on people all day long, but aside from not being particularly accurate, it is nothing but a distraction from the real problem of the perverse incentives involved with inflation targeting itself that lead to calamitous results especially when the inflation forecasts relied upon are wrong. IT is bad policy that needs to go, and this distraction gets us no closer to that end.