Unfortunately, the country hasn’t yet had what it needs in the transition from Ben Bernanke to Janet Yellen as Chairman of the Federal Reserve, which is an in-depth discussion of monetary policy priorities. It’s not too late, however, and timely as this leadership transition takes place. Ms. Yellen is no doubt a distinguished economist, but she is also an unapologetic Keynesian and is on record that Fed policy to attain maximum employment must take “center stage” for a long time to come. She appears to be even more doctrinaire on this priority than Mr. Bernanke and, given her background, we’ll probably even see a return to the Phillips Curve, a long-discredited theory that there is a direct tradeoff between inflation and employment and that we can have vigorous growth or low inflation, but not both. Reagan and Volcker put the stake in the heart of this theory, but Keynesians are stubborn.
She will admittedly also bring to the Fed Chairmanship an expansive view of the Fed’s responsibilities, which gives me additional heartburn, particularly since Congress has already given the Fed greatly expanded regulatory powers never contemplated by its historical mission to protect the value of the dollar.
And what of the immediate future of “quantitative easing”? I see no end in sight at least until the end of this administration. It should have been ended several years ago, has added no real value, and the longer we wait to “taper”, the worse will be the weaning process.