Janet Yellen's transitory inflation: A flawed pandemic inflation stance
By Vick Tan
web posted November 25, 2024
Janet Yellen's "transitory inflation" stance during the pandemic recovery period has become a focal point in critiques of the economic policies adopted under the Biden administration. As U.S. Treasury Secretary, Yellen initially downplayed the risk of long-term inflation, describing it as a "transitory" phenomenon that would ease as supply chains and labor markets normalized post-pandemic. However, inflation persisted, reaching a peak of 9.1% in June 2022, which brought intense scrutiny to Yellen's early assessment.
Yellen's "transitory" inflation assessment rested on sound economic assumptions about temporary disruptions. Initially, she argued that inflation was mainly driven by short-term supply chain issues and that as these disruptions subsided, inflation would ease. This analysis missed the extent to which the disruptions, such as semiconductor shortages and port backlogs, would persist due to COVID-19's lingering impacts on the global economy. Moreover, Yellen's assessment did not fully anticipate additional external shocks that would intensify inflationary pressures, including the Russian invasion of Ukraine in early 2022, which disrupted energy markets and escalated prices globally.
Beyond global supply chain issues, other factors exacerbated inflation in ways that a "transitory" model could not adequately capture. A critical point Yellen's analysis underestimated was the impact of pent-up consumer demand, fueled by unprecedented pandemic-era stimulus and high household savings. The U.S. government's fiscal stimulus policies, such as the American Rescue Plan, injected considerable liquidity into the economy. While these measures helped prevent economic collapse, they also accelerated demand, contributing to demand-pull inflation. Yellen's initial view was that this demand surge would normalize quickly as people resumed work and supply caught up, but tight labor markets and persistent supply bottlenecks prolonged the mismatch between supply and demand, further pushing up prices.
The Federal Reserve's decision to maintain near-zero interest rates and continue quantitative easing even as the economy began to recover created significant demand-side pressures. Low interest rates increased liquidity and made borrowing cheaper, stimulating both consumption and investment. Although these policies helped stabilize the economy, they also contributed to overheating by increasing the money supply and fueling inflation. Yellen's reliance on the "transitory" view arguably downplayed the long-term effects of these monetary policies and delayed the Federal Reserve's pivot toward rate hikes.
Janet Yellen's "transitory" stance on inflation during the pandemic recovery period was not only overly optimistic but also inadequately responsive to the factors driving price increases. Yellen's assessment fell short of addressing the broader economic dynamics. The consequences of this oversight are still felt acutely by the American people today. Elevated inflation directly caused by Janet Yellen's "stance" has eroded purchasing power, making everyday essentials like food, housing, and energy less affordable for many households. Moreover, the Federal Reserve's delayed but aggressive rate hikes, necessary to curb inflation, have increased borrowing costs for mortgages, auto loans, and credit cards, further straining household finances. 
This is Vick Tan's first contribution to Enter Stage Right. (c) 2024 Vick Tan.
