When Janet Yellen chairs her first meeting of the Federal Open Market Committee Tuesday and Wednesday, she will be presented with a once-in-a-generation opportunity that even her predecessors in the world’s most powerful economic position have rarely enjoyed.
Not only can Yellen alter the guidance on interest rates with which the FOMC has been steering global financial markets. Beyond that she could do something far more profound and exciting: transform an entire generation’s way of thinking about economics, market forces and the role of government in achieving and maintaining prosperity.
To start with the obvious, Yellen will almost certainly change or simply abolish the unemployment “threshold” of 6.5 percent announced early last year as a reference point for the FOMC to start considering the possibility of higher interest rates -- perhaps setting a threshold of 5 percent or so. More radically, she could supplement the objective of lower unemployment with a range of other indicators that will need to improve before the Federal Reserve even considers any monetary tightening: for example, accelerating gross domestic product growth; strengthening productivity trends and eliminating the excess capacity in many industries that is now discouraging investment, hiring and productivity growth, as well as holding down corporate pricing power.
This potential broadening of the range of monetary objectives suggests the really radical possibilities opened up by Yellen’s leadership of the Fed. Might she announce, for example, that as the economy recovers, the Fed will ignore accelerating inflation and focus entirely on promoting maximum employment, unless and until inflation exceeds some truly uncomfortable level such as 3 or 4 percent? Will she follow up on some of the work done within the Fed, suggesting that expansionary monetary policy can act not just as a cyclical stimulus, but could also improve supply-side conditions and long-term productivity growth?
Might she even suggest that, if the economy requires further monetary stimulus in future, Quantitative Easing could be coordinated with fiscal policy? For example, the Fed could print “helicopter money” for the government to “drop” directly on to the public via citizen dividends or per capita tax rebates.