CARDIFF GARCIA, HOST:
I'm Cardiff Garcia.
JACOB GOLDSTEIN, HOST:
I'm Jacob Goldstein, and this is THE INDICATOR, Planet Money's quick take on the news.
GARCIA: Today, Janet Yellen hosted her last meeting as chair of the Federal Reserve. It's her last week on the job. She's cleaning out her desk. She's eating the stale cake. She's saying goodbye to her colleagues.
GOLDSTEIN: And, Cardiff, in your prior job when you were working at the Financial Times, you covered Janet Yellen a lot.
GARCIA: Yes. In fact, it was my favorite thing to cover.
GOLDSTEIN: (Laughter) You love monetary policy.
GARCIA: I really do. And covering Janet Yellen and the Fed involved not just covering the specific policies of the Fed while she was chair but also the way she communicated those policies to the public - the way she explained them, the way she justified them. And I thought she was really good at this part of her job.
GOLDSTEIN: We were talking about this the other day, trying to figure out, you know, what show should we do for Yellen's last week at the Fed. And you mentioned to me this one speech that she gave that you said just captured so much about her and her time at the Fed. So today on the show, we are going to talk about that speech.
GARCIA: Yeah. I like this speech for a couple of reasons. One, it just lays out really clearly one of the most baffling mysteries in the American economy right now. And two, it revealed a certain boldness that she brought to the job because superficially, this looks like just one more speech about monetary policy. But when you look at it a little bit deeper, you'll see that the questions she's asking in it are really quite radical.
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GOLDSTEIN: All right, Cardiff. This Janet Yellen speech that you like so much, it was delivered last fall in Cleveland. And it was called "Inflation, Uncertainty, And Monetary Policy."
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UNIDENTIFIED MAN #1: Now please join me in welcoming Janet Yellen.
(APPLAUSE)
JANET YELLEN: Thank you, Chris. That was a beautiful introduction...
GARCIA: Yeah. And it's the speech where she addressed a question that's been stumping economists for a few years now. And that question is, why is inflation so low?
GOLDSTEIN: The basic reason this is a mystery is, you know, the economy's been getting stronger. More people have been getting jobs. And you would expect, once this happens, people are going to be getting raises, they're going to be buying more stuff. And all that should lead to higher inflation. And yet, that hasn't happened. In fact, last year, inflation was just 1.7 percent. That is today's Planet Money indicator - 1.7 percent. And it is below the Fed's target inflation of 2 percent. Inflation, in fact, has been below that target rate for almost all of Yellen's term as Fed chair.
GARCIA: Yeah. And in this speech, Yellen offers three main possibilities for why this might be happening.
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YELLEN: For example, labor market conditions may not be as tight as they appear to be.
GOLDSTEIN: Not as tight as they appear to be. In other words, she's saying we - the experts, those of us at the Fed - we might be underestimating the number of people who want a job but don't have a job.
GARCIA: So that's possibility No. 1 for why inflation is so low. Possibility No. 2 has to do with inflation expectations, or what the public expects inflation to do.
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YELLEN: Alternatively, long-run inflation expectations, which have an important influence...
GOLDSTEIN: And the idea here is that inflation expectations are this kind of self-fulfilling prophecy because if people think prices are going to go up, then they're going to go out and buy more stuff now before the price goes up. And buying all that stuff, that is going to drive the price up. So the higher people expect inflation to be, the higher inflation actually becomes.
GARCIA: And what Yellen is saying in this part of the speech is the theory might just be wrong. Inflation expectations might not actually predict what inflation will actually do.
GOLDSTEIN: They might not be self-fulfilling.
GARCIA: That's right. And she also says that it's really hard to measure inflation expectations in the first place.
GOLDSTEIN: (Laughter).
GARCIA: It's possible that the Fed just has it wrong here and that those expectations are lower than the Fed thinks they are. And that's another reason why inflation could be so low.
GOLDSTEIN: So OK, that is possibility No. 2 - a good wonky one. Here is the last possibility.
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YELLEN: More broadly, the conventional framework for understanding inflation dynamics could be misspecified in some fundamental way. Let's now consider...
GARCIA: That is the Federal Reserve chair's version of the shrug emoji.
GOLDSTEIN: (Laughter).
GARCIA: She's saying that there might be something that influences inflation that the Fed just doesn't understand or hasn't yet identified. She has some ideas - maybe something related to technological change or globalization - but she's saying she just doesn't know.
GOLDSTEIN: I got to say, this is an impressive part of the speech to me - right? - because here is Janet Yellen, the chair of the Fed, the agency charged with controlling inflation in America, and she's saying, you know, we don't really understand all there is to know about inflation.
GARCIA: And this is what I liked about the speech - the intellectual humility and even the courage it took to admit what she doesn't know. Keep in mind that this is the most powerful economic policymaker in the world. And you can also make a good case that she is the most qualified person to ever sit in the chair. And, look, I wouldn't say her tenure as Fed chair was perfect. I mean, the very fact that inflation was so low means that the economy could've even been a little bit stronger than it was. And I actually thought this was maybe the one glaring oversight in her speech - the thing she didn't mention - this idea that Fed policy itself might be a reason that inflation was too low.
GOLDSTEIN: So if she had been even more aggressive in trying to stimulate the economy, we might've had faster job growth. The unemployment rate might've fallen more quickly while she was Fed chair.
GARCIA: And we would've had those great things a little bit sooner. But by all accounts, she still did a very good job in her four years as Fed chair. And she was a model public servant. And in this speech, for the most part - which came near the end of her term - she was willing to admit that she still struggled, she still grappled with the most basic and fundamental parts of her job because she wanted to get it right. She was displaying this uncertainty all out in the open. This seems like a model for policymaking that's unfashionable now. But I find it to be one that's endearing and really kind of lovely. And I'm glad she provided it.
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YELLEN: I think gradual is reasonable.
UNIDENTIFIED MAN #2: That will conclude our remarks. Thank you so much for being with us.
(APPLAUSE)
YELLEN: Thank you, Chris.
UNIDENTIFIED MAN #2: Thank you.
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