It turns out it doesn’t matter if you’re a world-famous economist, a former chair of the most important central bank on earth, and now the chief economic policymaker of the world’s biggest economy—if you make a mistake, just admit it.
“I think I was wrong then about the path that inflation would take,” Treasury Secretary Janet Yellen said of her 2021 stance in a television interview last week. My bad.
So, Americans now are paying record-high gas prices, record-high food prices, and face months of inflation well above the 2% target most central banks think is a tolerable level for inflation because Yellen last year deemed it a “small risk.”
“As I mentioned, there have been unanticipated and large shocks to the economy that have boosted energy and food prices and supply bottlenecks that have affected our economy badly that I didn't – at the time – didn't fully understand, but we recognize that now...”
Economist Desmond Lachman called Yellen’s statement a half-hearted apology, noting that she failed to say administration policies contributed to the problem.
However unforeseen another COVID wave or a Ukraine war might have been, the $1.9 trillion fiscal stimulus in the 2021 American Rescue Plan, on top of $3 trillion in the previous year, was bound to overheat the economy.
“This lack of a real assumption of blame is very much to be regretted,” Lachman wrote. In other forms of government, a resignation would be in order.
Policymakers Align; Others See Economic 'Hurricane' On Horizon
Sadly, Yellen wasn’t alone. The Fed policymakers who worked at her side dutifully followed her lead. Current Fed Chairman Jerome Powell, who served on the board of governors with Yellen for four years when she was chair and two years when she was vice chair, famously labeled inflation “transitory” last year—until he realized how mistaken he was.
More recently, he acknowledged that “in hindsight,” the Fed should have acted sooner. The chairman doesn’t decide monetary policy alone, but he drives consensus and steers the Fed’s economists in the direction he wants them to go.
Now, everyone has got religion. Even Lael Brainard, the very dovish governor newly elevated to vice chair, was alarmed enough last week to say that the half-point rises envisaged for June and July are “reasonable,” and the case for a pause in September as floated by other policymakers is “very hard” to make.
Cleveland Fed chief Loretta Mester, who is considerably more hawkish, said on Friday that she is not convinced inflation has peaked. At best, in her view, the Federal Open Market Committee might go back to quarter-point hikes in September after the two half-point hikes, but that would depend on inflation data.
As she stated in an interview:
“I don’t want to declare victory on inflation before I see really compelling evidence that our actions are beginning to do the work in bringing down demand in better balance with aggregate supply.”
The Bureau of Labor Statistics reported on Friday that hiring continued strong in May, with 390,000 nonfarm jobs added. The silver lining was that average hourly wages had risen only 0.3% from April, slightly less than the 0.4% forecast and the same increase as the previous month. But one month does not a trend make.
Yellen got into further hot water over the weekend when prepublication excerpts from a forthcoming biography indicated she tried to scale back that $1.9 trillion American Rescue Plan passed in 2021 by as much as one-third for fear it would be inflationary.
The Treasury secretary immediately denied she had tried to limit the stimulus package and reiterated her belief that its passage played a “central role in driving strong growth through 2021.”
The biography, due out in late September, is by Owen Ullmann, a veteran editor at USA Today, who is meticulous in his reporting. The author acknowledges in the excerpts that Yellen eventually backed the legislation once it was going through Congress, but none of this is helping Yellen’s credibility.
Just a day after Yellen’s inflation acknowledgment, Jamie Dimon, chief executive of JPMorgan Chase, said he now sees an economic hurricane coming and not just the storm clouds he had predicted before.
“You’d better brace yourself,” Dimon warned at a financial conference in New York, though he couldn’t say whether it would be a minor hurricane or “Superstorm Sandy”—the deadly 2012 hurricane that caused nearly $70 billion in damage and killed more than 200 people.