A Kinder, Gentler Fed Chair
It is not certain that all of these goals are within Yellen’s reach. Some of the long-term unemployed no longer have the educational level or the skills to enable them to return to high-paying jobs. Some of the jobs that existed when the recession hit have simply vanished, moved to lower-wage countries, been eliminated by new technologies or by cuts in government employment. Loss of Obamacare subsidies might deter workers from re-entering the labor market, and the tax increases embedded in that legislation might discourage hiring, resulting in the loss of millions of jobs according to the non-partisan Congressional Budget Office.
Underlying Yellen’s intent to see so many aspects of the labor market set right are two assumptions. The first is that monetary policy can stimulate growth. The second is that faster growth will create more full-time, better-paying jobs to attract millions of workers back into the labor force.
She is smart enough to know that monetary policy alone can’t accomplish all her goals. Which is why she wants the federal government to reverse its fiscal tightening and loosen the purse strings, a position that sets many Republicans’ teeth on edge but persuades President Obama that he has made a wise choice for the job of Fed chair. Her main problem is that recent economic growth has far outstripped job creation, perhaps because employers worry that growth won’t be sustained, perhaps because new technologies allow production to expand far more rapidly than the number of jobs, perhaps because of uncertainty concerning the effect of the Obamacare regulations (now stacked seven-feet high and growing) on labor costs. So growth alone is not the complete answer to job-market weakness.
Still, Yellen is determined to face down critics who argue that her policies are storing up trouble for the economy, in three ways. First, they are setting the stage for future inflation. Second, low returns on safe government bonds are forcing investors to search for higher yields by taking on increasingly risky investments. Finally, low interest rates are contributing to rising inequality by inflating house and share prices, making the rich even richer—see the spurt in sales of vacation homes while average workers’ wages stagnate.
Only two things can force Yellen off course: a revolt by her Fed colleagues, or a decision by inflation-shy investors to drive interest rates up by selling bonds.