How the Biden administration misread the inflation threat

When President Joe Biden nominated former Fed Chair Janet Yellen to run the Treasury Department, his rationale was simple: “No one is better prepared to deal with this crisis.”

The crisis to which he referred was a “K-shaped” economic recovery that had exacerbated inequality in the wake of a once-in-a-generation pandemic. The administration had a simple plan, and Yellen would help carry it out. Once hundreds of millions of Americans were vaccinated against Covid-19, and trillions of dollars in new government spending flowed into the economy, the world would return to normal under a supercharged recovery.

One year later, a different problem – inflation – is dampening the recovery, sucking the oxygen out of strategy sessions, angering voters and threatening Democrats’ razor-thin governing margins. This is happening despite warnings from economists and months of vows from the Federal Reserve and the White House it would be short-lived.

Yellen, having herself helmed the central bank, which is tasked with monitoring and managing inflation, would seem uniquely suited for a moment when inflation is hitting four-decade highs. So how did the Biden administration miss the warning signs, and end up in this position?

More than a dozen economists, current and former administration officials, and former Fed officials — requesting anonymity to speak candidly about private discussions — point to a confluence of issues, including heavy Fed influence across the administration, overreliance on traditional forecasting, the political pressure to spend big, and a lack of urgency in deciding who would run the Federal Reserve and carry out its mission of managing inflation.

“It’s always going to be an issue in any White House, how the policy and politics interact,” said a former Fed official, who requested anonymity to discuss private discussions with the administration. “I just think they miscalculated.”

The Fed and the White House declined to comment on the record.

When Yellen took office in early 2021, she moved quickly to staff up Treasury, which was understaffed after the departure of Trump administration political appointees and because her predecessor, Steven Mnuchin, had shrunk the department. To do so, Yellen relied on experts in economics and labyrinthine political processes from the well she knew best – the Federal Reserve – causing a revolving door of new hires to spin even more quickly than normal.

Among those who came from the top ranks of the Fed to advise Yellen directly at Treasury: Linda Robertson, Michael Kiley and former Fed attorney Mary Watkins. Robertson and Kiley served on limited-term details and have since returned to the Fed, Robertson to shepherd the nominations…