Tags: Arends | Yellen | deflation | Akerlof

MarketWatch's Arends: Yellen Paper Signals She's Not Worried About Deflation

By    |   Wednesday, 12 February 2014 01:39 PM

New Federal Reserve Chair Janet Yellen doesn't appear to share her predecessor Ben Bernanke's obsessive fear of deflation, says MarketWatch columnist Brett Arends.

The Fed targets inflation at 2 percent, and its favored price indicator, the personal consumption expenditure price index rose only 1.1 percent last year.

Arends looked back at a 2005 paper written by Yellen and her husband, Nobel laureate George Akerlof, to illustrate her view toward deflation.

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"In a nutshell: unlike . . . Bernanke, Yellen doesn’t appear to think deflation is much of a risk, if any at all," Arends wrote.

"That would imply that she may prove less dovish on monetary policy than many people expect, more likely to taper the Fed’s bond buying, and indeed, when the time comes, more likely to raise interest rates."

Modern statistics around the world "provide no evidence of consistently declining inflation in the face of high unemployment," except in the case of Japan, Yellen and Akerlof wrote.

Meanwhile, economist Judy Shelton, co-director of the Sound Money Project at the Atlas Economic Research Foundation, argued in The Wall Street Journal that Yellen is too eager for an increase in inflation. Shelton criticized Yellen's emphasis in congressional testimony Tuesday on the need to raise inflation to 2 percent.

That "means her definition of price stability would let the dollar lose more than 20 percent of its value each decade," Shelton noted.

"Ms. Yellen might keep in mind what happened to Arthur Burns, who ran the Fed under President Richard Nixon and was considered a Republican loyalist."

Burns reputation was damaged by his willingness to give in to Nixon's desire for an accommodative monetary policy to boost the economy ahead of the 1972 election, Shelton explained.

Shelton agrees with former Fed Chairman Paul Volcker's take on the Fed's dual mandate to bring about maximum employment and price stability.

"I find that mandate both operationally confusing and ultimately illusory," Volcker said in a speech last year. "It implies a trade-off between economic growth and price stability, a concept that I thought had long ago been refuted not just by Nobel Prize winners but by experience."

As a member of the Fed board in 1996, Yellen was able to convince then Fed Chairman Alan Greenspan to refrain from a goal of pushing inflation to zero, she noted.

"In true Keynesian fashion, she reasoned that workers want higher nominal wages even when higher prices negate them. Better to accept the money illusion benefits of 2 percent inflation than to risk slipping into a deflationary spiral with rising unemployment," Shelton wrote.

"It is ironic that concern for wage earners serves to justify money pumping by the Fed that ends up largely benefiting people who have hefty stock-market portfolios, especially at a time when income inequality is a major White House theme."

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New Federal Reserve Chair Janet Yellen doesn't appear to share her predecessor Ben Bernanke's obsessive fear of deflation, says MarketWatch columnist Brett Arends.
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2014-39-12
Wednesday, 12 February 2014 01:39 PM
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