Larry Summers on Yellen, flat Phillips Curve

Less is more when it comes to Federal Reserve policy by Larry Summers

Flat Phills, all around by Jared Bernstein

Yellen, the Fed, K21 and inequality

Perspectives on Inequality and Opportunity from the Survey of Consumer Finances by Chair Janet L. Yellen

Chair Yellen Holds Forth on the Inequality of Opportunity by Jared Bernstein

What Janet Yellen Said, and Didn’t Say, About Inequality by Neil Irwin

World's Richest Man Tries to Defend Wealth Inequality by Dean Baker

Yellen

Transcript of Yellen and Lagarde Comments at IMF Event

Chair Yellen's press conference

BINYAMIN APPELBAUM. Binya Appelbaum, New York Times. You’ve spoken about\ the sense that the recession has done permanent damage to the economic output and you’ve reduced gradually over time your forecast of long-term growth. I am curious to know to what extent you think stronger monetary and/or fiscal policy could reverse those trends. Are we stuck with slower growth? Is there something that you can do about it? If so, what? If not, why?

CHAIR YELLEN. Well, I think part of the reason that we are seeing slower growth in potential output may reflect the fact that capital investment has been very weak during the downturn in the long recovery that we’re experiencing. So, a diminished contribution from capital formation to growth does make a negative contribution to growth. And as the economy picks up, I certainly would hope to see that contribution restored. So, I think that’s one of the factors that’s been operative. Of course, we’ve had unusually long duration unemployment. A very large fraction of those unemployed have been unemployed for more than six months. And there is the fear that those individuals find it harder to gain employment, that their attachment to the labor force may diminish over time and the networks of contacts that are—they have that are helpful in gaining employment can begin to erode over time. We could see what’s known as hysteresis, where individuals, because they haven’t had jobs for a long time, find themselves permanently outside the labor force. My hope would be that as—and my expectation is that as the economy recovers, we will see some repair of that, that many of those individuals who were long-term unemployed or those who are now counted as out of the labor force would take jobs if the economy is stronger and would be drawn back in again, but it is conceivable that there is some permanent damage there to them, to their own well-being, their family’s well-being, and the economy’s potential. 

Me: Strong monterary and/or fiscal policy can do a reverese hysteresis.

Yellen

Yellen talked up macroprudential policy and smacked down critics led by John Taylor who has yet to respond.

Apropos Piketty, macroprudential policy controls interest rates and returns that wealthier, more connected investors and savers can earn. The Fed funds rate is linked more to everyone else.

positive outlook

Maybe Lucy won't snatch the ball away this time.

1) Yellen making the right sounds. Rhetorically swats John Taylor.

"Yellen conceded that policymakers “failed to anticipate” the ensuing global financial crisis but also argued that monetary policy would have been “insufficient” to address the problems that caused it. Higher rates would not have beefed up regulation or increased the transparency of the exotic new financial instruments at the heart of the crisis -- or the firms that helped generate them.

In fact, Yellen said that raising rates would likely have caused greater unemployment, which would likely have led to more people defaulting on their debts."

2) John Williams predicts stronger growth in the 2nd half and over 3 percent the next 2 years. Could be good for the Democratic candidate in 2016.

3) Dean Baker:

Big Drop in Profit Share in First Quarter GDP
Tuesday, 01 July 2014 13:24

Quarterly GDP data are erratic and profit data in particular are subject to large revisions, but hey it's still worth noting a big drop in profit shares reported for the first quarter of 2014. The data released by the Commerce Department last week showed the profit share falling from just over 21 percent of net value added in the corporate sector in the last quarter of 2013 to less than 19 percent in the first quarter of 2014. Here's the picture.

It's too early to make much of this drop in profit shares. It is also a bit disconcerting that it is all attributable to a drop in the capital consumption adjustment, the difference between accounting depreciation and economic depreciation as measured by the Commerce Department. (In other words, the Commerce Department is showing a larger gap between what firms record for accounting purposes and the actual rate of depreciation of capital.) Anyhow, with all the appropriate caveats, this may be the first sign that the sharp rise in profit shares in this century is being reversed, or as Gerald Ford once said, our long national nightmare is over.

And he adds in comments:

can't attach much meaning to profit share drop
written by Dean, July 02, 2014 2:53

Ideally the drop in profit shares would mean that workers are getting a share of the gains from growth, meaning higher wages. But, the data for the first quarter show the economy shrinking, which means there were no gains to be shared. So we really can't draw much from this picture yet. However, if the profit share stays down and we get decent growth the rest of this year, that would mean that workers will finally be seeing some wage growth.

Yellen

Thoma links us to "Monetary Policy and Financial Stability" by Yellen

Yellen: Monetary policy not the right tool to curb financial excesses by Ylan Q. Mui

"...Yellen argued that those weapons would likely be more effective than the blunt tool of monetary policy. To make her point, she rebutted a common criticism that the Fed primed the stage for the Great Recession by waiting too long to raise interest rates, allowing home prices to rise unabated and encouraging investors to pile on risk.

Yellen conceded that policymakers “failed to anticipate” the ensuing global financial crisis but also argued that monetary policy would have been “insufficient” to address the problems that caused it. Higher rates would not have beefed up regulation or increased the transparency of the exotic new financial instruments at the heart of the crisis -- or the firms that helped generate them.

In fact, Yellen said that raising rates would likely have caused greater unemployment, which would likely have led to more people defaulting on their debts."

How does John Taylor respond?

wage inflation

More on the Important New Blanchflower/Posen Paper by Jared Bernstein

Yellen

Yellen’s words vs what you heard by Cardiff Garcia

"In other words, she doesn’t think inflation will threaten to breach the 2 per cent level so long as unemployment is “quite high”. 

This could be read either hawkishly or dovishly."

In other words they could close the output gap more quickly by breaching the 2 percent ceiling, but they won't have to raise interest rates while unemployment is still "quite high."

overshooting

Try overshooting for two years by Ryan Avent

THIS afternoon, Janet Yellen will release her first Federal Open Market Committee statement as chair and give her first post-meeting press conference. Conventional wisdom is that tapering will continue at its recent pace, and that the FOMC will clarify its forward guidance. It almost certainly won't be announcing a plan to tolerate above-target inflation in order to accelerate the recovery, despite the wisdom of that course.
...
It's a good post. I certainly agree that the mood of the Fed is not what one would call favourably disposed toward some overshooting. FOMC members came of age in the 1970s; as far as most of them are concerned it is never a bad time to trade off a little more unemployment for a little less inflation. Markets certainly don't expect any overshooting. 

But I don't think it is as completely off the table as Mr Duy suggests, for a few reasons. First, policy statements are there to be changed, particularly when the facts justify a switch. At the time the 2% target was set, the median FOMC member projected that the fed funds rate would be 0.75% by the end of this year. Markets now anticipate rates reaching that level in 2016. The longer the Fed maintains its anachronistic policy position, the longer the American economy remains stuck against the zero lower bound. At some point, someone at the Fed may notice this. 

Second, while hopes for a more ambitious policy agenda from Ms Yellen have diminished, it is still the case that there is no time for a regime change like a regime change. It's Ms Yellen's Fed now, and her committee may arrive at a different judgment than Mr Bernanke's. It almost certainly won't, but it could. 

Third, there is actually a lot of wiggle room around that 2% target. As recent experience has shown: the annual change in the price index for personal consumption expenditures—the magic indicator in the target statement—has been below 2% since April of 2012. Indeed, over the past year inflation has been below 1.2% on average. One might argue that a steadfast commitment to a 2% inflation target demands some overshooting to make up for this long period of underperformance; after all, a central bank that tolerates undershooting of its target but not overshooting is missing its target on average. 

Fourth, it's not clear that the Fed has entirely ruled out something of that nature. On the one hand, statements continue to note that the Fed will take a "balanced approach" as it begins to pull back on accommodation. On the other, it was not long ago seen as significant that the the head of the Fed's monetary affairs division was putting his name to researchdemonstrating the benefits of overshooting. 

Though it would be the right thing to do, I don't expect the Fed to announce a new 3% inflation target or 5% wage growth target, or declare its intention to make up half of the shortfall in nominal output relative to the pre-crisis trend. Though it would be a very good thing to do, I don't expect them to say that, in order to defend the integrity of their 2% inflation target, they intend to make up the shortfall in inflation accumulated over the past two years with an 18-month period of overshooting. But while I don't expect those things, I don't think they are entirely outside the realm of possibility, nor do I think that the Fed tied its hands forever in January of 2012.

Yellen

Before the Fed Meeting: Inflation Hawks, Draw in Your Talons! by Jared Bernstein 

I’m confident one can trust the Yellen-led Fed to largely tune out the building chorus telling them to pre-emptively tighten because somewhere, somehow, there’s some inflation out there. 

That doesn’t mean they’re all inflation doves—remember, Yellen was bugging Greenspan to tighten in the mid-1990s (thankfully, he didn’t take her advice as the economy hit full employment and price pressures failed to appear). It just means that in weighting their dual goals, based on the data, they should still be up-weighting full employment over price stability. Output gaps remain a much larger challenge than price pressures.

James Tobin

James Tobin doesn't seem to get enough credit or recognition. In this interview, Krugman points to a book of his. In the recent Time magazine cover story, it describes how Yellen was his graduate teaching assistant and took marvelous notes which he used.

Interplanet Janet

Janet Yellen: The Sixteen Trillion Dollar Woman by Rana Foroohar

"I'd like to see real wages going up," Yellen says, adding that the average American male worker's inflation-adjusted wages have been flat or down for the past 20 years."

And via Thoma:

Recurring Themes for the New Year by Charles Evans

ways to ease while tapering

The Fed Tapered Perfectly—Here's What It Needs To Do Next by Matt O'Brien

Since then, the Fed has tried to explain that less bond-buying doesn't mean rates will rise faster. The opposite, actually. The Fed will try to counteract its reduced bond-buying by raising rates even slower than it planned before. So it's taking monetary stimulus out with the right hand, and putting it back with the left. And there's still plenty more it can put back. After all, the Fed hasn't explicitly lowered its unemployment threshold, nor added an inflation floor. It's just suggested it will do both—and that was enough for now. That the taper didn't make stocks fall or expected rates rise shows that it was.

But there's still work to do. Unemployment is still above target, and inflation is still below. In fact, the Fed expects inflation to stay below target all the way through 2016. As Robin Harding of the Financial Times points out, that's the Fed admitting that it plans to fall short of what it says the best policy is right now. That best policy—what Janet Yellen calls "optimal control"—calls for above-target inflation the next few years to bring down unemployment faster. You can see what that looks like in the chart below from a speech she gave last year. 

In other words, the Fed doesn't need to figure out how to keep monetary stimulus constant even as it tapers. It needs to figure out how to increase monetary stimulus even as it tapers. Or stop tapering.

Yellen Senate hearing

The Yellen Doctrine: Robust Growth Is the Priority, but Bubbles Matter by John Cassidy

Janet Yellen should worry GOP policy elites. A lot. by Ryan Cooper


Hard Money Senators' Big Contradiction by Yglesias

Yellen

Three Interesting Points From Janet Yellen's Testimony by Yglesias

Yellen to Back Stimulus Plan in Remarks to Senators by Binyamin Appelbaum

Yellen and inequality

Yellen’s Challenge at the Fed: Speaking Persuasively to Investors by Binyamin Appelbaum

Some analysts see these shifts as relatively inconsequential. They argue that Ms. Yellen would retain the strongest hand in setting the Fed’s course, and that tapering asset purchases would be a sufficient concession to maintain a majority.

“The institutional momentum is there even as the people in the chairs change,” said Diane Swonk, chief economist at Mesirow Financial in Chicago.

Ms. Swonk said the new voices probably would cause some confusion, but “it increases uncertainty more than it changes the course of monetary policy.”

Rethinking the Rise of Inequality by Eduardo Porter

Inequality: The Democrats' Next Frontier by Yglesias

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. 

agita

Adjusting the Taylor Rule for the Unemployment Rate Bias by Jared Bernstein

There are various different rules and techniques for estimating the optimal FFR (Federal Funds Rate), but John Taylor’s rule is probably the most common.*

*Janet Yellen’s recent “optimal control” work is also gaining prominence in this space.  By simulating a path toward a goal like full employment, optimal control techniques return both a path for the FFR and inflation (other variables could easily be included but these are the key ones).

See the figures on pages 28-30 from this Yellen paper.  Relative to various Taylor rules, the technique allows inflation to temporarily exceed the target rate (2%) as the unemployment rate falls (I should note that optimal control assumes inflation expectations remain well-anchored, an assumption that will produce agita for some price hawks).

 agita - heartburn