WASHINGTON — Janet Yellen looks to be taking a page from Alan Greenspan’s playbook while tearing up another as she plots monetary strategy for 2015 and beyond.
The Federal Reserve chairwoman and her colleagues signaled this month they would be willing to push unemployment below its so-called natural rate — a feat Greenspan as chairman managed in the late 1990s without fanning much inflation. Yellen showed less desire to pursue her predecessor’s “measured” approach to raising interest rates in the mid-2000s, suggesting his strategy may have fostered complacency that made a small contribution to the financial crisis.
The late 1990s “was a very good period for the U.S. economy, and Greenspan made the correct call on monetary policy,” said Michael Gapen, a former Fed official who is now senior U.S. economist for Barclays Capital in New York. On the other hand, “there is a general consensus the way they did policy wasn’t right” in the run-up to the housing bust that preceded the 2007-09 recession.
Yellen stressed to reporters Sept. 17 that the Fed’s actions would depend on how the economy evolves. “There is no mechanical” approach to carrying out policy, she said, adding that “many people” think the Fed relied too much on a lock-step strategy in the mid-2000s.
James Bullard, St. Louis Fed president, is among those who argue that approach led to complacency about the Fed’s intentions and too much risk-taking by investors and home buyers.
“The 2004 to 2006 tightening cycle was way too mechanical,” he said Sept. 23. “There was so much predictability there that I think it did foster asset-price bubbles.”
Yellen’s strategy has its risks. A persistently easy monetary policy designed to push unemployment down could unleash unexpectedly strong wage and price pressures.
