The Arizona Republic today reviews a speech given by Yellen in January, 2007 in Phoenix:
It was January 2007 when Yellen, then head of the Federal Reserve Bank of San Francisco, spoke here about financial literacy before transitioning into comments about the economy — comments that now look remarkably unperceptive.
Back then, months before the real-estate and banking crisis took down the economy, Yellen expressed concern that inflation was uncomfortably high while job gains were coming too swiftly.
“If labor markets are as tight as the unemployment rate suggests, then there may be reason for concern about building inflationary pressures,” she said according to my Jan. 18, 2007, article.
Subsequent events showed that inflation was the last thing we had to worry about, while the lack of jobs has emerged as a central drag on the economy. Back then, U.S. unemployment was around 4.5 percent. But after the recession took hold, it more than doubled, peaking at 10 percent in late 2009. At 7.3 percent currently, it remains well above where it should be this far into an economic recovery.
In contrast, core consumer inflation (which excludes food and energy costs) of 1.8 percent today has hardly budged from the 2.2 percent rate that had Yellen all worked up back then.
In another comment during her Phoenix talk that now looks wildly off-base, Yellen, who later was named vice chair of the Fed’s board of governors, said recession risks had receded despite lingering weakness in housing. She cited the Valley as a place where home-price appreciation had come down from unsustainably high rates of increase.
The Great Recession, as we all now know in hindsight, began later that year, triggered by a home-price slide of epic proportions.
I don't want to beat her up too bad for missing the bubble burst, since most everyone did. They also all missed the last bubble burst, and the one before that, etc.
This is what makes me crazy: not that these folks were wrong, even consistently brutally wrong, but that they display absolutely no modesty in their actions given that they were so wrong. They propose policy steps, such as seemingly eternal QE, that are astoundingly risky unless one assumes that they have a very, very good grasp on exactly where the economy is going. Which they clearly never have had in the past. If they acted like they had been wrong most of the time, then I would have little to criticize. But to be consistently wrong and then make huge risky bets as if you have reliable predictive powers is hubris of the worst sort.