Economist's Insights

Yellen Acknowledges Inflation Paradigm May Be Inaccurate:

Sep 26, 2017

Yellen Acknowledges Inflation Paradigm May Be Inaccurate:  In Janet Yellen’s speech yesterday at the NABE conference, she acknowledged that the Fed may be missing something on the inflation puzzle, conceding that it was possible the economy could possibly sustain a higher rate of output with lower unemployment.  If so, she said that scenario could require a more accommodative stance for monetary policy.  She balanced that openness with saying that based on their current understanding, it was appropriate to continue adjusting monetary policy at a measured pace.  She cited the belief that inflation would rebound in the medium term and the risk that the labor market could overheat.  However, her admission that their paradigm could be wrong reflected less confidence in that view.  Generally, this is the same position Chair Yellen has had recently.  The uncertainty over the inflation picture is unlikely to lead to a quick change in policy direction (unlikely to affect the odds of a December hike).  Given that her tenure as Fed Chair ends in February, her evolving position may become irrelevant if she is not reappointed.  However, if she is, it is very likely to become relevant.