Shhh ... Don't Let Anyone Know You Want Maximum Employment.

Yellen.jpgNow that she's the top choice to be Vice Chair of the Federal Reserve, San Francisco Fed President Janet Yellen is going around telling everyone that -- really! -- she's not dovish on inflation. Oh my no.

In the mid-1990s, for example, she urged then-Fed-chairman Alan Greenspan to push interest rates higher as unemployment fell, advice he ignored. She said she is no more dovish than other Fed officials. "I have personally supported an increase in our target for the federal funds rate on 20 different occasions," she said.

While it's not a threat right now, Ms. Yellen said "I don't want to see inflation pick up." She added, "when the time has come, am I going to support raising interest rates? You bet."

Ah. When is that time?

Ms. Yellen is very focused on the large amount of slack in the economy, which economists often refer to as an "output gap."

"I don't expect the output gap to completely disappear until sometime in 2013," she said. "If the economy continues to operate below its potential, then core inflation could move lower this year and next," she said.

The mores of the Federal Reserve fascinate me. This is an institution that has two mandates -- price stability and maximum employment -- but admitting that you care about the latter is so controversial as to be dangerous to your chances of working at the institution. It's as if firefighters, charged with both rescuing people and putting out fires, emphasized during their job interviews how committed they were to the latter goal but promised not to rescue anyone unless the conditions were superb and it wouldn't bother anyone. Weird, wild stuff.

In violation of Washington tradition, though, Yellen doesn't equivocate around her potential nomination, saying she'll serve if asked.

-- Tim Fernholz

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