In March of 2021, when the Biden administration was on the verge of sending Americans $1,400 stimulus checks (to bridging the gap between the $2,000 direct payments Donald Trump insisted on before he left office and the $600 checks Republicans cleared before Congress flipped to Democrats), Janet Yellen made a cameo on ABC’s “This Week.”
At the time, Larry Summers was just beginning to warn about the risk of materially higher inflation outcomes in the US. Yellen wasn’t convinced.
“If we get back to full employment, could we see inflation surge?” George Stephanopoulos wondered. The answer, as it turns out, was a resounding “yes.” Inflation began to pick up the very next month and it remains hopelessly elevated to this day.
In hindsight, Yellen’s response to Stephanopoulos was cringeworthy. “I don’t think it’s a significant risk,” she said. “And if it materializes, we have tools to address it.”
It did materialize, and so far, the Fed’s “tools” have proven woefully inadequate to contain it in a timely fashion.
The ABC interview wasn’t the first time Yellen downplayed Summers’s concerns, and it wouldn’t be the last. Just a month prior to her chat with Stephanopoulos, Yellen showed up on CNN and told a visibly perturbed Jake Tapper that Summers was wrong.
“Summers suggested that [Joe Biden’s stimulus plan is] just too big — it would flood the economy with too much money and that could lead to rising inflation,” Tapper said. “Why is Summers wrong? Why are you confident this will not cause rising inflation?”
Yellen brushed Summers aside as though he were a nobody. She spoke for almost three minutes, uninterrupted, before she even addressed Tapper’s question about inflation. And when she did, she said this:
My predecessor — you know, he’s indicated that there’s a chance that this will cause inflation — that’s also a risk that we have to consider. I’ve spent many years studying inflation and worrying about inflation. And I can tell you that we have the tools to deal with that risk if it materializes.
Again, the “tools” Yellen mentioned have so far proven inadequate at best. At worst, the Fed’s rate hikes have proven almost wholly ineffectual.
Some of my contemporaneous editorializing from early 2021 now seems every bit as laughable as Yellen’s remarks. Although I at least identified the canaries (e.g., base effects, input cost pressures evident in PMI surveys, rising commodity prices and what, at the time, was a nine-month run of gains on the UN’s gauge of global food costs), I echoed Yellen in insisting that protracted unemployment was the bigger risk.
“The chances of the US experiencing hyperinflation are tiny,” I wrote, while documenting Yellen’s ABC appearance. “By contrast, the odds of long-term unemployment remaining elevated and of the pandemic leaving an indelible mark on the economy are extremely high,” I added, in the course of insisting that “inflation isn’t anywhere near the top of the worry list for the US coming out of the pandemic.”
Most of that was wrong, to put it politely. Unemployment didn’t stay elevated. It plummeted to a 70-year low, and there are now around 11 million unfilled job openings across the economy. It’s never been harder for employers in America to find labor.
Although my use of “hyperinflation” mitigated an otherwise wholly misguided take on the risk of runaway price growth, that’s small comfort if it’s any at all. The “hyperinflation” hedge was a straw man. The odds of true hyperinflation in America weren’t just “tiny,” they were infinitesimal. The question was never about 40% CPI, let alone 500% or 1,000%. I can’t recall whether I was deliberately employing a straw man because part of me worried Summers might be right, but it’s certainly possible.
The point, on the two-year anniversary of inflation’s acceleration in the US, is that almost everyone was wrong and Larry Summers was mostly right, even if, as some economists argue, he was right for the wrong reasons.
Note that because Wall Street economists tend to take their cues from the official narrative (just as company analysts take theirs from the C-suite), virtually all sell-side forecasts were much closer to Yellen’s benign inflation assessment than Summers’s warnings, some of which seemed needlessly alarmist at the time.
It’s with all of that in mind that I wanted to highlight the juxtaposition between Yellen’s still optimistic take on inflation, and Summers’s still cautious assessment.
On Friday, just hours before data showed the Fed’s preferred inflation gauges are rising on a YoY basis again, Yellen pointed to falling 12-month readings as evidence that the disinflation process is ongoing. Later, during remarks to Bloomberg, she marked her assessment to market, as it were. “Inflation continues to be a problem,” she said. “The data we’ve seen suggests it’s not yet under control, but it’s come down.”
Summers, meanwhile, took to social media, where he reiterated that there’s “no real historical precedent for the idea of a managed disinflation from current levels without recession.”
Despite January’s run of hot data in the US, Summers remains concerned about a downturn. Now, he’s even more worried. Summers recently suggested the idea of the Fed going back to half-point rate hikes at next month’s meeting is a bad one given the sheer amount of ambiguity facing policymakers. He’s also variously warned on the risk of a “Wile E. Coyote” moment for the economy.
Given both the January PCE figures and the upward revision to the core PCE reading in the second estimate of Q4 GDP+, Summers now thinks a soft landing is even less likely than he already believed.
“Friday’s PCE figures and big upward revisions for the fourth quarter, are very troubling [and] suggest the Fed may have made much less progress in containing underlying inflation than has been generally supposed,” he continued. “If the economy keeps growing at recent rates, inflation is unlikely to settle near the 2% range, though there may be temporary sharp declines.”
Summers went on to suggest that the market is “substantially” underestimating the odds of much higher rates, and said he’d be “quite surprised if inflation comes near target without a recession.” At the same time, he expressed “much less” faith in monetary policy given that “a variety of factors like inventories, high employment relative to output and depleted savings suggest the economy could hit an air pocket.”
Much as it pains so many in the macro community to concede that Summers has been more right than virtually anyone else who’s weighed in consistently in public about the likely trajectory of growth and inflation over the past two years, the inescapable reality is that his warnings have been prescient.
If there’s a good reason to doubt him now, it’s just that accurate macro forecasting is nearly impossible, so the odds of anyone being mostly right for three years in a row are about as long as the odds of US inflation accelerating to three or four times the Fed’s target and staying there. Oh, wait…
In all fairness to you and everyone else….
Putin Hooten and shootin
Yes, … and the seeming war on immigrants who would love to come and fill some of the job openings…
Yeah Larry was mostly lucky. I don’t accept Summers being “right”. He was fortunate. Anyway, even if Powell tightened sooner inflation would still be almost as high as it is. Look around the world. New Zeeland and Canada tightened more quickly and implemented less fiscal stimulus up front. By Summers logic, that should have resulted in much lower inflation in those countries. Take a look at those countries- they both have high inflation similar to the US.
I’m beginning to wonder if the inverted yield curve is more about the bond market getting the long term inflation rate wrong than the FED overdoing it on the short end. A long time ago, the bond market got the end of inflation wrong. Clearly 15% for 30 years wasn’t a good idea in the early eighties. As with the stock market, the turns are very hard to predict.
That’s absolutely possible. In fact, I’d say that as things currently stand, that’s the most accurate assessment.
Ironic to me that while many comment on OVERLL monetary conditions not being restrictive, while the fact that Fed controlled monetary policy is still stimulative by any historic measure.
Get on your Bloomberg termina, use FRED Data, or pull the numbers in from Macrotrends …. use any possible combination of measures of inflation data (PCE, YOY CPI, PPI,) and any proxy for monetary policy (Target Fed Funds Rate, 2 Year notes, 1 Year T-bills) and Monetary policy is the eunuch that showed up at a gun fight with a spoon.
For example, Target Fed Funds Rate (FDTR) is still 1.6% LESS THAN YoY CPI, versus a mean of 90 basis points GREATER THAN than using data going back to 1970 (which should encompass almost any economic environment you might hope for).
So, the Fed has not become restrictive, is NOT rolling off its balance sheet, and overall monetary conditions are easy, …. so what sort of success in reducing the rate of inflation would you possibly expect?
FWIW (which let’s be honest is nothing), this is roughly my take as well. Interest rates currently aren’t high enough to sop up all the excess money in the system via the pandemic checks, PPP, QE, etc.
It’s usually not the general direction policymakers get wrong after an economic shock, but the magnitude.
Things change. Shouldn’t policy choices be flexible?
Rate hikes are damaging Main Street with little to show for it. Again, how do higher rates reduce food or healthcare inflation? Crushing housing does what to lower rents?
But people in the markets, ivory towers and readers here are mostly insulated from such concerns. It’s just an annoyance for us anointed ones. Not for 80% of the population.
What if the data used by the Fed is inaccurate?
https://markets.businessinsider.com/news/stocks/economy-survey-response-rate-inflation-federal-reserve-policy-interest-rates-2022-12
All class. It takes a very confident person, which you clearly are, to post up such an admission of a bad call. It’s yet another reason why your Report is worth the price of admission. You put out your best assessment and the admit when a course correction is needed. Rare.
I can’t remember when (Nov/Dec 21 or Jan 22), but it was a 180 turn from “transitory” to inflation is becoming embedded, a problem, etc. The tenor of those articles changed immediately.
I turned aggressively hawkish on inflation/Fed policy during the first week of February 2022.
agreed
It takes a big man to admit he was wrong and for you to do it so humbly is a breath of fresh air. You do admit on a regular basis that economics is a soft science. I am not a trained economist but as the last inflation numbers prove, inflation is still bad and not getting better, You are also correct that we most likely will not achieve hyperinflation. Because of policy lag they will overshoot causing a recession. I don’t think it is possible to tame inflation while we are fighting Russia.
A 2% target inflation rate given current macro and micro circumstances is completely unrealistic imho…
Right and wrong…Most people are luckuy if they are right more than 50% of the time. In the interest of humility, I ask myself When I am right, particularly when I am very right, what percentage was I right for the wrong reason. Here’s what I learned, Next time we have a systemic crisis, let’s give all the money to bottom 80%, and don’t bail out the finance industry and the huge companies like airlines that spent 85% of their free cash flow on stock buybacks. They should have bought a 25 % shar eof the airlines instead of giving them money….We’re going to have inflation for a long time, but the bottom 80% didn’t get a raise for 40 years.