Thread by @GeorgeSelgin

I think Yellen's rate increases are badly misunderstood. In fact there were a blunder; and not a small one (1.5% is a lot more than it used to be!). However....

https://twitter.com/cullenroche/status/1331383959352008707

the culprit IMHO wasn't Phillips curve thinking or any hawkish overestimation of the risk of inflation. It was the Fed's frankly unthinking approach to post-QE policy "normalization."

Genuine normalization should have been about (1) unwinding the Fed's balance sheet and (2) moving from a floor to a "corridor" system of the sort planned when interest payments on reserves were 1st authorized in 2006.

As for the policy rate target itself, barring any separate policy rethink, it ought to have been set according to the Fed's established rule, which we now think of as having been a sort of forward-looking inflation targeting.

Instead, Fed officials convinced themselves that normalization meant moving toward a "normal" nominal rate setting closer to 3%--as if the pre-2008s norm could serve as a guide to the right post-2015 rate setting!

Have a look at the following FRED chart, keeping in mind that the Fed had officially announced its adoption of a 2% (forward-looking) inflation target in January 2012:

It's pretty clear that, whatever was driving the Yellen-era rate hikes, it was neither high PCE inflation nor rising inflation expectations. On the contrary: those should have favored keeping IOR at 25 bps, if not lower.

Nope. The culprit was the Fed's resolve to get "the federal funds rate and other short-term interest rates to _more normal levels_...by adjusting the interest rate it pays on excess reserve balances" (my emphasis). federalreserve.gov/newsevents/pre…

So, yes, the Fed under Yellen blundered. And, in retrospect at least the blunder was serious. But this was not so much a matter of "hawkishness" in the usually understood sense: it was due to a foolish notion of what getting back to "normal" monetary policy meant.

I offer no opinion concerning the bearing any of this should have on how one assesses Yellen's past performance, let alone her fitness for her new post. @DavidBeckworth @sam_a_bell @NathanTankus @TimDuy @vtg2 @michaelsderby @michaelsderby @TheStalwart

For "there" please read "they." Thanks!