178 THE BiG DROP
bility in setting policy. The dual mandate allows the Fed to
manage the U.S. jobs market and, by extension, the econo-
my as a whole, instead of confining itself to straightforward
liquidity operations.
Janet Yellen, the Fed chairwoman, is a strong advocate of
the dual mandate and has emphasized employment targets in
the setting of Fed policy. Through the dual mandate and her
embrace of it, and using the dollar’s unique role as leverage,
she is a de facto central planner for the world.
Like all central planners, she will fail. Yellen’s greatest defi-
ciency is that she does not use practical rules. Instead she uses
esoteric economic models that do not correspond to reality.
This approach is highlighted in two Yellen speeches. In June
2012 she described her “optimal control” model and in April
2013 she described her model of “communications policy.”
The theory of optimal control says that conventional mon-
etary rules, such as the Taylor Rule or a commodity price stan-
dard, should be abandoned in current conditions in favor of a
policy that will keep rates lower, longer than otherwise. Yellen
favors use of communications policy to let individuals and
markets know the Fed’s intentions under optimal control.
The idea is that over time, individuals will “get the message”
and begin to make borrowing, investment and spending deci-
sions based on the promise of lower rates. This will then lead to
increased aggregate demand, higher employment and stronger
economic growth. At that point, the Fed can begin to withdraw
policy support in order to prevent an outbreak of inflation.
The flaws in Yellen’s models are numerous. Here are a few:- Under Yellen’s own model, saying she will keep rates
“lower, longer” is designed to improve the economy
sooner than alternative policies. But if the economy
improves sooner under her policy, she will raise rates
sooner. So, the entire approach is a lie. Somehow
people are supposed to play along with Yellen’s low