Yellen-Greenspan

'Greenspan’s Dilemma Revived' by Thoma

Izabella Kaminska at FT Alphaville:

Greenspan’s dilemma revived, by Izabella Kaminska: Deficit continues to be a dirty word in the US..., whilst the idea that the US is an unsustainable deficit spender increasingly propagates in mainstream circles.

But, as Ethan Harris at Bank of America Merrill Lynch shows on Monday, nothing could be further from the truth. In reality the US deficit is contracting at a relatively speedy rate... And, bar the employment situation..., all of this comes in the context of an ever more quickly reviving economy...

Which leaves the following as the most notable point being made by Harris, in reference to the natural unemployment rate (NAIRU):

    If inflation persists below 1.5%, we would expect the interest rate forecast to drop further. We also expect the FOMC to cut its unemployment rate guidepost for hiking rates from 6.5% to 5.5% or lower. Ultimately, the Fed may decide to “overshoot” the inflation-neutral NAIRU to force inflation back up to target.

This in itself could become ever more crucial in the months to come. In short, it echoes exactly the same sort of dilemma Alan Greenspan faced all the way back in 1996. Do you raise rates despite little obvious inflationary pressure and risk stagnating growth? Or do you give the notion of a “new economy” — the idea that technological change is fuelling a boom in productivity and alleviating inflationary pressures — the benefit of the doubt?

Janet Yellen, it must be said, is uniquely positioned to make that call if she is confirmed. Not only was she there the first time around, she may have had more input on Greenspan’s ultimate decision than many remember. Call it something akin to mea culpa dotcom crash hindsight.