# Kathleen Hays Presents: Central Bank Central
## Yellen: One More Rate Hike Needed to Curb Inflation, Fading Supply Shocks to Do the Rest
Former Fed Chair less worried about downside risks to labor market than six months ago, says Fed must not let inflation expectations rise and create “70’s problem”
Janet Yellen has held more highest-level Federal Reserve leadership positions than anyone in the central bank’s history. It starts with her first two separate stints on the Fed’s Board of Govors in Washington, separated by her appointment to head the president’s Council of Economic Advisor. Next she took on the job of Fed district bank president at the Federal Reserve Bank of San Francisco. Her climb in roles as a top leader at the Fed continued as she went back to D.C. to fill its two top positions, first as vice-chair at the Board and then as (the first woman) to become Fed Chair when former Chair Ben Bernanke departed.
When she stepped down as Fed chair in 2018, all of this was not enough for her, or President Joe Biden as he appointed her to be the Treasury Secretary. And she has also interspersed all of this with her years as an economics professor at top universities doing high level, deep-dive research into the forces that drive monetary policy, labor market dynamics, and more.
Not only does this mean it takes more time to introduce her, a duty and privilege I eagerly accept, it underscores that Janet has long-term perspective built on years of practice and research on what has driven the Fed over many decades, and what is driving it now.
She joins me after the Fed at its recent September meeting has done its first rate hike to bring down inflation since 2023 and is widely expected to hike rates at its last meeting of 2026 in December. What does she see the Fed doing next, what would be driving her decision on rate hikes?
Janet responds with a classic Fed answer. She would look at the Fed’s dual mandate of maximum employment and price stability. On the labor market side she sees unemployment at 4.2% “which exactly matches the FOMC’s “central median estimate of the of the longer-run normal rate.”Even in this no hire, no fire labor market she notes that the unemployment rate is still low and has fallen some.
”I think the labor markets are okay…and I’d say I’m a little bit less worried about downside risk to the labor market now than I might have been five, six months ago.”
”Then with respect to inflation, obviously inflation is too high,” Janet says. “And we have a bad starting point in that inflation has been above - and sometimes well above - the FOMC target for five years. So that makes me feel like **a major focus should be on inflation.”**She does not view wage growth or labor costs as the core problem. With productivity growth near 2% and unit labor costs rising only about 1.4%, she argues that labor-market pressures are broadly consistent with the inflation target.
Instead, she identifies successive supply shocks: tariffs, the Iran war’s effect on energy and refining costs, and the AI boom’s effect on semiconductors and data-center construction. “It’s different things. It’s a series to my mind. It’s a series of supply shocks.” Because these shocks raise the price level rather than necessarily creating permanent inflation, Yellen believes inflation could decline over the next couple of years as their effects fade.
And the problem in her mind is that rate hikes can’t solve shock-driven inflation forces. “Normally the way tighter monetary policy works is by weakening the labor market and bringing down wage growth” so excessive tightening could produce job losses while only gradually curbing price rises.
