Janet Yellen Uses Traditional Economic Models to Increase Interest Rate
On one hand Janet Yellen is guiding the Federal Reserve to increase the interest rates using traditional economic models, while on the other hand, some economists are worried as it might results in a failure.
The 69-year-old economist argued on the point that the time is very near when there will be a rate-lift-off even though inflation has to still pick the pace. Yellen trusts the decades of studies that suggest a tight labor market eventually creates inflation pressures.
This could be a risky thing considering that global inflation is at historic lows and many central banks remain in an easing mode as their economies struggle to get any traction. If Yellen is right, then she will cement her reputation and that of her ‘dashboard’ that relies on long-established relationships between jobs, wages and prices. Yellen has already presided over the end of the Fed's bond-buying stimulus program.
But if she proved to be wrong, the Feds cold join the European Central Bank and the central banks of Sweden, Israel and Canada, all of which have tried, but failed to escape the drag of zero rates in the wake of the 2007-09 financial crisis.
Randall Kroszner, who served with Yellen as a Fed governor between 2006 and 2009, said, “It is possible, though unlikely, the traditional models are just all wrong (and) we're in a whole new world. But she's not going to fly by the seat of her pants”.
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