San Francisco Federal Reserve Bank head Janet Yellen, Democratic stalwart and wife of Nobel Prize winner George Akerlof (co-author of "Animal Spirits" with Robert Shiller), is reported by Calculated Risk to have given a downbeat speech tonight. You can link to a nice summary by clicking here. (The actual text of the lengthy speech can be obtained by clicking here.) The bulk of what she says makes sense. However, CR's post ends with the following quote from Dr. Yellen:
"I think the predominant risk is that inflation will be too low, not too high, over the next several years."
She did not say that she fears rampant deflation; that would indeed be a consummation devoutly to be wished against. But given how much prices have risen the past 3-5 years, how can inflation possibly be too low?
If she wants the Fed to make some money from monetizing the debt and buying gazillions of dollars worth of ultra-low interest rate mortgages, how on earth can the Fed wish for anything but very low inflation to justify very low or even declining interest rates?
And if the Fed engineers another big inflation, it will be many years before anyone willing lends money to the Federal Government at other than a high interest rate. Bond vigilantes returned recently merely due to the huge Federal deficits. Just wait to see their vigilante behavior if inflation resurges. It won't be pretty.
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