House Speaker Nancy Pelosi dismissed inflation as a “global phenomenon” on CBS’ “Face the Nation” on Sunday — but U.S. Treasury Secretary Janet Yellen went on the record with The Wall Street Journal to acknowledge the Federal Reserve is partly to blame for 8.2% inflation in the U.S.
Pointing to “cognitive bias,” the WSJ pointed out the resilience of the U.S. economy to resist inflation following the Fed’s fiscal and monetary policy during the 2008 financial crisis and the long, slow recovery that followed.
With the eventual success of that approach top of mind for Federal Reserve officials, the Fed prioritized saving jobs during the COVID pandemic in 2020 and 2021 — thereby miscalculating the overstimulation of $7.5 trillion in relief and its direct impact on inflation.
Likewise, Yellen said, she did not put the pieces together fast enough to prevent the mortgage-backed securities crisis of 2007-2009 when she was vice chairman of the Federal Reserve. She did confront top Countrywide Financial executives about taking on too much risk via mortgage derivatives — but the warning was not nearly enough.
“I’m sorry,” Yellen testified before Congress after the mortgage-backed securities crisis erupted in 2008. “I wish I had, but I didn’t.”
The WSJ chalks up this lack of foresight to a simple human foible known as recency bias, which, evidently, can weaken the judgement even of Fed policymakers.
Economists and psychologists began studying cognitive bias in the 1970s and 1980s, concluding that this psychological quirk can impair even rational economists’ judiciousness and undermine theories of efficient markets.
In March 2020, the U.S. economy was only newly recovering from high unemployment of 6.7%, paired with low 1.3% inflation. The new Federal Reserve Chairman Jerome Powell was firmly of the belief that low interest rates were central to the U.S. economy’s success. When COVID hit, he doubled down on that belief by bringing the fed funds rate near zero.
The government could stimulate the economy readily with interest rates low, the thinking was, leading the Trump administration to add $4.5 trillion to the national debt in 2020 to save the U.S. economy from the near-complete pandemic shutdown. That relief also entailed Trump and Congress sending COVID relief checks to Americans and payroll support.
Upon taking office in January 2021, Biden continued that relief with another $3 trillion in economic stimulus, including the $1.9 trillion American Rescue Plan.
Yellen gave her blessing to Biden for this approach, both before and after the presidential election, believing that overstimulating the economy was a wiser choice than not doing enough, according to people familiar with her views.
“What was in her mind while giving that advice?” WSJ inquires. “The last recession weighed heavily, according to her comments and others who worked on developing the program. The previous recession seemed to demonstrate that high unemployment would linger if not treated aggressively. It had taken a decade after the 2007-2009 recession for the jobless rate to return to its pre-recession lows.”
Also central to Federal Reserve opinion: “The previous decade also seemed to indicate the government could borrow at low interest rates to provide stimulus at little cost, because inflation was stubbornly low.”
As Yellen summarized the Biden administration’s thinking during her confirmation hearing in January 2021, “The smartest thing we can do is act big. In the long run, I believe the benefits will far outweigh the costs.”
Yellen held her opinions even when told by former Treasury Secretary Lawrence Summers, a Democrat, that if the government took this route, it would cause inflation by overstimulating consumer demand. Yellen reportedly admitted to Summers that inflation was possible but that she believed it would only be fleeting.
When Yellen and Powell finally conceded earlier this year that inflation has taken a stranglehold on the economy, Yellen and other leading Biden administration officials blamed “unprecedented” factors caused by COVID.
“The pandemic had many unique features and, perhaps, we didn’t entirely realize, with some of the unique features of the pandemic, how they would play out,” Yellen said.
Yellen’s and Powell’s failure to see inflationary signs as they were forming may be why there are rumors in Washington that Yellen, at least, will step down after the midterms. But Yellen says she has no intention of doing so.
Pointing to the Russia sanctions, the global minimum business tax and climate change legislation, Yellen says the Biden administration has accomplished a lot and gives her good reason to stay
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