July 08, 2015
Background
The Federal Reserve Act requires the Federal Reserve Board to submit a Monetary Policy Report semiannually to the Senate Committee on Banking, Housing, and Urban Affairs and to the House Committee on Financial Services, along with testimony from the Federal Reserve Board Chair. Chair Janet Yellen is next scheduled to appear before the committees on July 15 and 16, 2015.
There has been much discussion in the media about the likelihood of the Fed increasing interest rates as early as September. Such action would cause the unemployment rate to rise and slow our economic recovery, especially harming low-income workers and communities of color. (For more details, please see here.)
At the upcoming hearings, it will be important for committee members to ask questions of Chair Yellen that elucidate this debate and the relative merits and drawbacks of lifting interest rates. Some questions that we believe would help do so are below.
Questions for Fed Chair Janet Yellen
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What does Fed research indicate is the lowest unemployment can go before causing spiraling inflation?
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What is the consequence of going below this unemployment rate, for example by 0.5 percentage points?
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How confident can we be in these measures? Specifically, can we be more confident in the Fed’s estimates of the NAIRU (non-accelerating inflation rate of unemployment) today than the estimates used by economists in the 1990s which generally put the NAIRU close to 6.0?
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What would have been the consequences in the 1990s if the Fed had raised interest rates in the mid-1990s, in order to keep the unemployment rate from falling below its estimates of the NAIRU?
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When was the last time the United States had a problem with spiraling inflation?
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How large where imports and exports relative to the U.S. economy in the 1970s? How large are they today? Is it reasonable to think that the growth in the trade share of the economy might limit the extent and speed at which inflation might accelerate due to a low rate of unemployment?
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You’ve written that one of the reasons that inflation did not rise in the 1990s was that the changes in the consumer price index reduced the measured rate of inflation relative to the actual rate of inflation. If workers failed to recognize the importance of these changes to the CPI, they may have effectively reduced their wage demands as a result of the changes.
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In the 1970s, there were errors in the measurement of the rate of inflation by the CPI that caused it overstate inflation by more than 5 percentage points compared with current measures. Would you expect this overstatement of inflation in the CPI to have played a role in the acceleration of inflation in the 1970s? If so, then wouldn’t that suggest that even in the 1970s the acceleration of inflation was not just a simple story of unemployment being too low?
