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A Known Known at the Fed

11/14/2013

Janet Yellen has been nominated by the President to be Chairman of the Federal Reserve System in January.  With all due respect to Ms. Yellen, I agree with Warren Buffet in wishing the President had re-nominated Ben Bernanke for another term.

Yellen will be grilled today by the Senate Banking Committee, as part of the nomination process.  More is already known about her economic views than we knew about Bernanke’s views when he was confirmed.  For example, she clearly has a more dovish attitude toward inflation than most economists.

Every central banker in the world has a single goal, i.e., control inflation.  Our central bank, however, has two, i.e., control both inflation and unemployment.  The Fed was given this dual mandate when economists believed in the “Phillips Curve,” which says there is a trade-off between unemployment and inflation.  In other words, if you want to lower unemployment, you must accept higher inflation.  Conversely, if you want to lower inflation, you must accept higher unemployment.  We have now learned the connection between the twin evils of unemployment and inflation is more loose than anyone expected many years ago.

A Fed Dove is a Fed Governor who accepts higher inflation more readily than a Fed Hawk who accepts higher unemployment.  By all accounts, Yellen is a dove.  What does that mean?

Inflation may rise.  Deflation becomes less likely.  Unemployment will fall or rise less than otherwise.  Money supply will continue to rise quickly.  The dollar will weaken.  Exports will rise.  The price of imports will rise, thereby reducing imports.  Both our trade deficit and our balance of trade will improve.

One can argue that the Fed is already doing all that, and they would be correct.  The difference is that nobody knew Bernanke would take us down that trail, but I believe Bernanke was a solid Republican pragmatist who was willing to do anything to keep the Great Recession from becoming Depression II.  Going forward, the difference between Bernanke and Yellen would be that Bernanke would limit monetary stimulus like quantitative easing sooner than Yellen.

Since Yellen is an extremely qualified economist, since she will be the first woman ever appointed to be Chairman of the Fed, and since I think she is the first Vice-Chair of the Fed to become Chairman, she is both exceptionally well qualified and well experienced.

As a footnote, it is simply stupid for Senator Graham to put a hold on her nomination until he gets satisfaction, if that is ever possible, on Benghazi, which Yellen knows nothing about.  If he thinks the Fed had anything to do with the tragedy in Libya, he is too stupid to serve.  Holding up anybody’s nomination to be Fed Chairman because of Benghazi is as stupid as holding up the nomination until the government tells us “the truth” about UFOs in Roswell.

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