Goshen News, Goshen, IN

Business

March 19, 2014

Yellen can get advice at home

(Continued)

The Fed has recently lowered the pace of its monthly bond buying from $85 billion to $65 billion, a figure that could fall further after this week’s meeting. Yet the Fed continues to maintain that short-term rates will stay near zero.

Yellen told members of Congress that extremely low inflation “gives us ample scope to continue to try to promote a return to full employment.”

Her husband has been blunter about the possible trade-offs between inflation and job growth.

“Most of us think of central bankers as cautious, conservative and safe,” Akerlof said in his 2001 Nobel Prize lecture. “But I consider many to be dangerous drivers: To avoid the oncoming traffic of inflation, they drive on the far edge of the road, keeping inflation too low and unemployment too high.”

His speech suggested that higher inflation would spur workers to demand pay raises because higher prices would squeeze their existing income.

Fed watchers usually classify this perspective as “dovish” — a willingness to keep pumping cash into the economy at a pace that could alarm inflation “hawks.” Still, Akerlof’s former students said this classification underplays the depth and independence of his analysis.

“To call Akerlof ‘dovish’ is to vastly underrate the seriousness of his thought,” said John Cochrane, a finance professor at the University of Chicago who studied under Akerlof at Berkeley. “He’s a brilliant economist and unmotivated by ideology or partisanship.”

Yellen, too, has been classified as dovish. In the past, she has suggested that inflation above 2 percent would be temporarily acceptable if it sped the pace of hiring.

The couple first met at a Fed cafeteria in 1977. He had already achieved some measure of fame for his 1970 paper “The Market for Lemons.” In it, Akerlof demonstrated through used cars the economic problems caused when a seller has more information than a would-be buyer does. It was an insight, in part, that led to his sharing a Nobel prize decades later.

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