Janet Yellen says it’s time to stop calling inflation ‘transitory’

Fed chair was addressing staff and discussed the role of inflation in the Fed policymaking process

Janet Yellen says it’s time to stop calling inflation ‘transitory.’

The US Federal Reserve chair, Janet Yellen, is calling for more predictable processes for raising and lowering interest rates, particularly since inflation has had a stronger-than-expected rebound in recent months.

The yield on the 10-year Treasury bond, which moves inversely to price, rose to almost 2.95% on Friday from a 1.71% average rate during her tenure, according to Tradeweb.

Yellen said in a Wall Street Journal article: “Over the years, I think that the predominant response of policymakers in terms of interest rate policy has been, ‘Well, is this temporary or isn’t this temporary?’ I’m concerned that that focus has become less clear in recent years as inflation has been more persistent and as longer-term trends in inflation compensation have shifted downward.”

Yellen, who was invited to discuss the topic of guidance with the staff during a retreat last week, talked about some of the factors affecting Fed actions such as falling rates, faster growth, inflation.

“The idea of rapid growth and then your worry about inflation running too fast, it’s a sensitive topic and it is absolutely appropriate that policymakers, the FOMC [Federal Open Market Committee], pays careful attention to any risks in the outlook.”

Although Yellen said she was pleased with the new stance of policy by the Fed, as argued in the Journal article by her political economist colleague, Lars Svensson, she cautioned against looking for deeper answers from it.

“The research that I can do on my own is to look at the relationships between data and expectations. But it’s very hard to capture that dynamic. We’re in a very dynamic world, very different than how we used to think about these issues. And there are a lot of pieces that you don’t see emerge until four or five years later. It’s not like you really see the bridge until quite late in a process,” Yellen said.

Yellen raised her key interest rate two times in 2016 and it was raised one more time in December of last year, where the majority of FOMC members thought it appropriate to tighten policy further. In addition, the market is pricing in at least one further interest rate hike in the second quarter of this year.

“More important than that, though, is whether there are actually better and simpler and more efficient ways for policymakers to address price and wage pressures and build confidence in the economic outlook,” Yellen said.

“I worry about the increased complexity of markets and the ongoing volatility of currencies and interest rates in the world economy. There is still a great deal of uncertainty about the likely evolution of the economy. And so, while I like what the [Federal Open Market Committee] and the bond market have done recently, I think it will be extremely important to consider alternative ways of communicating that greater clarity and that greater stability of forward expectations.”

Yellen discussed her views on automation, particularly in the information technology sector, as a contributor to the rise in inflation expectations. She said policymakers would “be justified in thinking that it will take a while for technology to reach near equilibrium before labor markets are dominated by computers”.

Despite her concern with in the number of job openings in the US – around 6.2 million as of November – as well as the larger inventory of homes on the market, according to the latest report, Yellen said she is not putting too much weight on unemployment.

“The transition from full employment to full employment may be occurring faster than many expect. But, over time, full employment is a relatively short-run phenomenon, and a more stable rate of unemployment that is consistent with the dual mandate is probably necessary to promote full employment and stability in inflation expectations.”

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