GOP rips Yellen after botched predictions on inflation
Congressional Republicans breathed fire at Treasury Secretary Janet Yellen this week during testimony in front of both the Senate Finance Committee and the House Ways and Means Committee over soaring inflation that has hit near 40-year highs in the wake of the coronavirus pandemic.
The former Federal Reserve chair admitted last month she’d been wrong on inflation, which could remain at elevated levels into 2023.
“Is there a risk of inflation? You responded, ‘I think there’s a small risk,’” Sen. John Barrasso (R-Wyo.) said to Yellen during a meeting of the Senate Finance Committee Tuesday, referring to comments she made early last year.
“Given that, it makes me wonder why Americans should put any confidence in your pronouncements and decisions and recommendations today.”
The “small” and “manageable” risk that Yellen thought inflation posed last year turned out to be something much more serious, and she acknowledged the miscalculation in frank terms at the end of May.
“I think I was wrong then about the path that inflation would take,” she told CNN at the time. “There have been unanticipated and large shocks to the economy that have boosted energy and food prices, and supply bottlenecks that have affected our economy badly that I didn’t, at the time, fully understand. But we recognize that now.”
Republicans argued that Democratic stimulus packages like the American Rescue Plan, which extended stimulus measures enacted during the Trump administration, were driven by this misunderstanding of the risk of inflation.
“I think that there’s no question that the $2 trillion bill last year overheated the economy, and it’s why we have the mess that we have today,” Sen. John Thune (R-S.D.) said to Yellen, echoing sentiments from several other Senate Republicans.
The mood from GOP lawmakers in the lower chamber was no less castigatory.
“As I listened to you here today, and I look at what’s not been done by this administration, it’s really perplexing in a lot of ways on whether the administration is tone deaf or unaware or becoming aware right now,” Darin LaHood (R-Ill.) said during a meeting of the Ways and Means Committee Wednesday.
LaHood pointed to criticism of U.S. monetary policy made last year by Larry Summers, a Democratic economist who’s become a favorite among conservatives for breaking from the party line regarding the health of the economy during its period of recovery.
“I go back and I look at what President Obama’s Treasury secretary, Larry Summers, said, alerting the administration in February of 2021 about the fear of this and what was going to happen, and why something wasn’t done there,” he said.
In May of 2021, Summers warned about “very substantial risks on the inflation side” and characterized President Biden’s fiscal stimulus as “rather overdoing it.”
Further evidence for the fiscal exacerbation of inflation — which economists agree has been caused by supply chain issues and an excess of consumer demand that extends beyond the regulatory controls of government policymakers — was provided by the San Francisco branch of the Federal Reserve in March with a research paper often cited by Republicans.
“Problems with global supply chains and changes in spending patterns due to the COVID-19 pandemic have pushed up inflation worldwide. However, since the first half of 2021, U.S. inflation has increasingly outpaced inflation in other developed countries,” the Fed paper read.
“Estimates suggest that fiscal support measures designed to counteract the severity of the pandemic’s economic effect may have contributed to this divergence by raising inflation about 3 percentage points by the end of 2021,” it concluded.
Even Democratic Rep. Brian Higgins (N.Y.) asked Yellen about how stimulus affected the economy.
“Do you subscribe or support the statement that because of what we had to do in the short term, got a lot of money into an economy that’s 70 percent consumption, that we had too much money chasing too few goods? And to what extent is that the reason for the inflationary rate as it is today?” he asked.
Yellen responded: “That spending produced excellent rewards for Americans and at most it contributed modestly to inflation.”
Democratic lawmakers have previously grumbled about the Federal Reserve, arguing the central bank didn’t recognize the risk of inflation sooner and work to decrease its balance sheet and raise borrowing rates.
“I recall urging the Fed late last fall that they would start needing to ratchet these rates up. I wish they would have done earlier,” Sen. Mark Warner (D-Va.) said during an interview in May.
The Fed raised its baseline interest rate in the beginning of May by 0.5 percentage points.
International economists have made similar points, taking issue with what the United Nations Department of Economic and Social Affairs (UN DESA) calls “ultra-loose monetary policies — injecting massive liquidity into the financial system.”
They’ve also pointed a finger at the Federal Reserve’s asset-buying program known as quantitative easing, which the bank only started to undo last month.
“Central banks have relied heavily on unconventional monetary policy tools, especially large-scale asset purchases to respond to the pandemic,” the U.N. agency wrote in February. These programs have “contributed to an underpricing of risk and sharp increases in asset prices. Major central banks now face the challenge of unwinding their massive stimulus programs without creating financial market turmoil and destabilising global financial flows.”
It’s this kind of turmoil that financial markets are currently experiencing.
Since the Fed’s first interest rate hike in May, the Dow Jones Industrial Average index of major U.S. stocks is down 3.5 percent, the S&P 500 is down more than 4.3 percent, and the technology-heavy Nasdaq is down nearly 7 percent. All three indexes have experienced high volatility during that period.