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Larry Kudlow on Janet Yellen

Posted by Larry Doyle on March 13, 2010 7:13 AM |

President Obama will likely nominate Janet Yellen of the San Francico Fed to replace Donald Kohn as number two in the hieracrchy at the Federal Reserve behind Fed Chair Ben Bernanke.

What can we learn about Ms. Yellen? Let’s read Larry Kudlow, a highly regarded economist and market practitioner with extensive experience on Wall Street, in Washington, and on the airwaves. Kudlow and Yellen look at the economy from a decidedly different perspective. Kudlow recently wrote of Ms. Yellen’s nomination and what it says about the Obama administration in his Kudlow’s Commentary:

The new Obama Fed is going to be very dovish when it comes to fighting future inflation and defending the value of the dollar.

The president has nominated Janet Yellen to be vice chair of the Federal Reserve. Ms. Yellen is a distinguished economist who unfortunately subscribes to the Phillips-curve model that trades off unemployment and inflation. In other words, rather than excess money creation as the cause of rising prices, she focuses on the unemployment rate, the volume of new jobs being created, and the growth of the overall economy. For Ms. Yellen, inflation is caused by too many people working and too much economic prosperity.

And since we have the opposite problem today — high unemployment and too few people working — she will be the last Fed governor to turn out the lights on the central bank’s zero interest rate.

There is no evidence in Ms. Yellen’s public opinions or speeches that she might use a market-price rule — targeting commodities, gold, bond rates, or the dollar — as a forward-looking inflation (or deflation) signal. So the absence of a commodity- or dollar-price rule will continue at the Fed. Bernanke doesn’t use a market-price rule, and Obama’s additional Fed appointees — whoever they are — will undoubtedly come from the same Phillips-curve camp.

Supply-siders like myself who believe that only market prices can provide accurate signals of the supply and demand for money are going to be very disappointed. If the Fed supplies more cash than markets want, the inflation rate can go up whether unemployment is high or low. We learned this painfully in the 1970s, when high unemployment was accompanied by high inflation.

And this is a crucial juncture. The Fed is going to encounter excruciatingly difficult problems as it deals with the magnitude and timing of its decisions to start withdrawing excess cash and raising the fed funds target rate. Markets should be the guideposts for these decisions, not the unemployment rate.

Janet Yellen, who served as a top economic advisor to Pres. Bill Clinton and was a Clinton appointee to the Federal Reserve Board, has for the past six years been the president of the San Francisco Fed. She is a very able economist. But if you work from the wrong money model, you are likely to get the wrong money results.

The likely Yellen appointment is not a surprise. Obama’s economic team has paid mere lip service to defending the value of the dollar.

Will Kudlow’s reference to the economic malaise of the 1970s during the Carter administration be prescient? Time will tell, but we need to know who our trail guides are as we navigate the economic landscape. With Ms. Yellen marking the trail, the chances for stagflation just increased.


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  • Duke

    If Barack and team are looking to whip up a nice big batch of redistribution economics, they are going to need chefs like Yellen to stir the brew and simmer the broth.

    Can you say Jimmah Cahrtah…!!

  • fred

    The latest buzz…

    Biflation, best decribed as persistent inflation and deflation at the same time. Differs from stagflation in that lower/slower growth is not a necessary component.

    Inflation in the things we need: cable, electric, school, gas, food. Deflation in the things we want: houses, cars, furniture, appliances, notebooks.

    Through non-reported pricing disparities biflation also enables “subtle” income re-distribution to take place.

    As examples: my local gas is $2.76/gal, if I travel just 10 miles to another town prices are $2.60/gal. I bought 2 healthcare product today at the local drugstore. Cost $9.99. By effectively using store generated coupons the cost could have been lowered to $1.36. (I ended up paying $7.00, it was only after I arrived home and analyzed the sales slip that I realized I could have paid less).

    Makes you wonder about the cummulative impact of your spending habits on the cash you keep!

    By reaching a little, biflation also appears to seperate most public and non-profit expense from private, for profit expense.

    In the interest of establishing friendly debate, by far the largest outlay of most local (city/town) budgets is the cost to educate our children, has any (city/town) effectively outsourced this function to a private corporation along the lines of a CCA?

    Given the recent furor over excessive public pensions maybe city/town managers, mayors and officials have lacked the political will to manage costs more effectively.

    Which is better/worse, political or profit motivation?
    Why do we allow politics to dominate the non-profit function in our society?

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