Justin Lahart: Heard on the Street: Targeting the Fed's Inflation Problem:
Federal Reserve policy makers will debate this week whether it is time to start scaling back bond purchases. One argument against: Inflation is far too low. Since January 2012, the Fed has set as its target a long-term inflation rate of 2%. And since then, inflation has fallen increasingly short of that. As of July, the Commerce Department's price index for personal-consumption expenditures, excluding food and energy--the Fed's preferred measure--was running just 1.2% above its year-earlier level. To get to 2% by the end of 2013, the index would have had to increase at a 3% annual rate in the final five months of the year. It hasn't held that sort of pace since the early 1990s….
Fed officials and most private economists thought inflation would be stronger this year. That it hasn't presents something of a mystery, given the overall economy has performed broadly in line with forecasts. It may simply be they underestimated how much slack remains in the economy…. Another reason inflation has been so low may be that people have simply come to expect it to stay that way…. Because the Fed cares so much about its inflation-fighting credentials, the 2% level may serve as more cap than target. So the Fed is like a cautious golfer driving a ball toward a green in front of a sand trap--it tends to come up short.
One very powerful technocratic reason to prefer Summers over Yellen was that he would look at the Fed's current policy dilemmas with fresh eyes, while she is strongly invested in the belief that the policies that have produced the current outcome--1.2%/year inflation, 7.3% unemployment rate, 58.6% civilian employment-to-population ratio--are the best the Federal Reserve can do.
In fact, it is not the best we can do. The Federal Reserve needs a regime shift--like the ones that Takahashi and Chamberlain imposed on Japan and Germany in 1931, like the one that FDR imposed on the United States right now, like the one that Abe is currently imposing on Japan. There are candidates off the short list who would push immediately for such a regime shift--cough, Christina Romer, cough. And my fear right now is that Janet Yellen has wrongly prejudged the issue of whether a Federal Reserve regime shift is needed right now, and will not revisit the issue de novo next year when I think the odds will be 80% that a regime shift will still be desirable.
That said, the other candidates on the short list are even less inclined to adopt the policies the U.S. economy needs right now. And there are powerful non-technocratic reasons--breaking glass ceilings, not making every decision a kick in the face directed at the left wing of your coalition--for choosing Yellen as well.