Former Federal Reserve Board Chairwoman Janet Yellen discusses monetary policy and the economic outlook at Stanford University on January 19, 2017.
Elijah Nouvelage | Getty Images
When was the last time you heard a U.S. Treasury secretary essentially suggest the Federal Reserve may need to raise interest rates … even modestly?
Yeah, neither have I!
But it appears that Treasury Secretary Janet Yellen, herself the most recent former chair of the Federal Reserve, did just that.
Only G. William Miller, in the Jimmy Carter years, served briefly as both Fed chair and then Treasury secretary, albeit briefly and relatively unsuccessfully. And I don’t recall him doing that as an inflation super-cycle took hold in the late 1970s.
Yellen, in this latest chapter of inflation history though, may well be right.
With fiscal relief and stimulus approaching $7 trillion, or over 30% of current GDP, it might be best not to have fiscal and monetary policy running flat out for the foreseeable future.
I said as much in a prior commentary. There should be, at least some, dynamic tension between fiscal and monetary policies given that both are historically easy.
The U.S. didn’t even spend this percentage of GDP throughout World War II, when government expenditures reached the highest point in U.S. history.
Yellen, well-versed in inflation dynamics and labor markets, is cautioning the Fed to avoid experimenting with allowing inflation to run too far above trend for far too long.
We’re certainly not there yet, but it does appear that Yellen still subscribes to the Fed preempting incipient inflation and not waiting until it shows up in hard data.
With lumber, copper, base metals, input costs for businesses, all racing ahead, pipeline inflation is already real.
This is not the phantom inflation of prior periods, this may well be the real deal … which means interest rates, both nominal, and real, (adjusted for inflation) are too low to persist for too long.
Many companies, including Warren Buffett’s Berkshire Hathaway, are able to pass along their rising input costs in the firm of higher prices, something we’ve not seen in decades, to their customers without complaints.
That means that while inflation may be transitory, a one-time adjustment to last year’s deflationary recession, it may also be sticky and accelerate going forward, as wages are likely to rise in tandem in this cycle.
I, for one, am heartened to hear Yellen make such a responsible, though politically unpopular, declaration.
It may not even sit well with President Joe Biden, as higher rates could, at least in theory, jeopardize an economic recovery and raise the government’s cost of borrowing just as several trillion dollar’s worth of bonds are set to go on sale.
Still, these comments only burnish Yellen’s reputation as a realist and one who understands that there are many tradeoffs required in the formulation of making economic policy.
Give her the credit due her. She’s on the “straight talk express,” a line popularized by the late renegade Senator, John McCain.
Yellen, whether she’ll admit it or not, is trying to fine-tune fiscal and monetary policy simultaneously. It’s a brave and bold move, the likes of which we need more. She’s also right.
Let’s just hope the right people listen … for a change.
—Ron Insana is a CNBC contributor and a senior advisor at Schroders.
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