On July 12, Federal Reserve chair Janet Yellen testified before the Financial Services Committee of the House of Representatives pursuant to the release of the semiannual Monetary Policy Report to Congress.
Among her observations, there was this: “It appears that the recent lower readings on inflation are partly the result of a few unusual reductions in certain categories of prices….Nevertheless, with inflation continuing to run below the Committee’s 2 percent longer-run objective, the FOMC indicated in its June statement that it intends to carefully monitor actual and expected progress toward our symmetric inflation goal.”
Later, “because the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance.”
That’s central banker speak. To decode it a bit: a “neutral rate” is a Fed Funds rate which is neither an accelerant nor a brake for economic activity, which neither overheats nor cools the system. In mainstream economics, it is closely associated with a low rate of inflation thought to have the same Goldilocks property.
Hawks ands Doves
Yellen believes this desired neutral interest rate is presently at a range between 1 and 1.25%. Further, she believes it has nearly been reached; only a little extra tightening will get us there. In the terminology of monetary policy, her views are regarded as slightly “dovish.” Presumably the guiding metaphor is that hawks want to wage a war on inflation and doves want to make a compromise peace with inflation.
After a long period of asset-heavy balance sheets at the Fed and interest rates that actively discourage savings, a “hawkish” view would be that the new tightening will have to go on for a while longer.
Although the identification is imperfect, in debates about the Fed in the policy sphere anti-inflation hawkishness is often linked with the right, and dovishness with the left.
The following day, July 13, Yellen was back on Capitol Hill, this time before the Senate Banking Committee. Her prepared remarks, and the underlying report, were of course the same on both days.
From the Right
Peter Schiff, an economic pundit with conservative credentials, tweeted out his complaint on the 13th that Yellen’s testimony was all “smoke and mirrors.”
Yellen and company love smoke and mirrors. It muddies the water and keeps everybody wondering. https://t.co/0kplXDeNba
— Peter Schiff (@PeterSchiff) July 13, 2017
On his website, Schiff went further, complaining that central bankers in general and Yellen in particular “shift back forth like the ocean tides” ratcheting rates up at “breakneck speed” for no discernable reason then taking the foot off the accelerator with the same opacity.
More broadly, Schiff takes issue with the underlying idea of a neutral rate. The august central bankers “have no idea what they’re doing, but want to give the impression of having everything under control.” This mythical neutral rate allows them to do this.
Ryan McMaken of the Mises Institute likewise, in his reaction to Yellen’s testimony, focused his fire on this idea of a natural/neutral rate. Saying that the “natural rate” is low “allows the Fed to create the perception that its very-low target rates aren’t really all that stimulative at all. They’re practically neutral!”
Thus, they prepare to over-stimulate the economy whilst keeping themselves in invincible ignorance that they are doing any such thing.
The right of center has long since appropriated the old Jacksonian notion that hard money is better than soft, and that the hardest money of all, actual gold coins, is best. But in recent years, bit coins and other cryptocurrencies have acquired some cache. If these are “hard” money in any sense it is not because of their Jacksonian physicality (they don’t have that) but because of their blockchain.
Someone just held up a “buy bitcoin” sign behind Yellen during her testimony pic.twitter.com/FYEnkIDJbN
— Steve Kopack (@SteveKopack) July 12, 2017
From the Left
The left has long distrusted creditors, and in each generation a new sort of debt relief comes to the political fore.
Since debt payments are typically designated in nominal currency numbers, the inflation of a currency is an obvious form of debt relief, and has sometimes been defended in precisely those terms. (William Jennings Bryan’s famous demands for bimetallism, essentially for expanding the money supply by adding another metal to the mix, demands made on behalf of his indebted small-plot former constituents, come to mind.)
Perhaps more important, the U.S. government is itself a debtor, and since it also gets to print the world’s numéraire currency, its leaders naturally feel a temptation to administer a little debt relief in this form to their own fisc. This temptation, too, is typically felt on the left side of the center line in politics, as inflation seems a preferable alternative to “austerity.”
Given this background, it is understandable that some commentators, for example Daniel Gross at Slate, have referred to inflation dove Janet Yellen as the “Democrats’ only hope in a Trump-run Washington.”
— Progressive Economy (@ProgressEcon) November 29, 2016
The same sense of a moderate left that is appealing to Yellen for help showed up on social media even as she was testifying.
During the House hearing, Rep. Maxine Waters (D-CA) praised Chair Yellen for her “steady leadership.”
The Financial Service Democrats then tweeted out news that Waters had commended Yellen, and Waters herself retweeted that news flash:
— Financial Svcs Dems (@FSCDems) July 12, 2017
During her Senate testimony, Forbes contributor Jesse Colombo tweeted of her as the potential worker of a miracle, no less!
— Jesse Colombo (@TheBubbleBubble) July 13, 2017
The politics surrounding the President’s upcoming decision on a replacement for Yellen will surely be polarized and intense.