Fed’s Yellen: "High pressure" policy may be needed for recovery

Fed Chairwoman Janet Yellen is crossing the wires now during a speech in Boston at "The Elusive 'Great' Recovery: Causes and Implications for Future Business Cycle Dynamics" 60th annual economic conference, where she is stating that short-term rate cuts alone may be "inadequate" in the future.

Key quotes from the speech:

"If we assume that hysteresis is in fact present to some degree after deep recessions, the natural next question is to ask whether it might be possible to reverse these adverse supply-side effects by temporarily running a "high-pressure economy," with robust aggregate demand and a tight labor market. One can certainly identify plausible ways in which this might occur."

"In particular, the remarkable stability of various measures of expected inflation in recent years presumably represents the fruits of the Federal Reserve's sustained efforts since the early 1980s to bring down and then stabilize inflation at a low level. The anchoring of inflation expectations that has resulted from this policy does not, however, prevent actual inflation from fluctuating from year to year in response to the temporary influence of movements in energy prices and other disturbances."

"Research by Federal Reserve staff suggests that, all told, U.S. monetary policy spillovers to other economies are positive–that is, policies designed to provide stimulus to the U.S. economy also boost activity abroad, as negative effects of dollar depreciation are offset by positive effects of higher U.S. imports and easier foreign financial conditions"

More headlines:

  • Policy may want to be extra-accommodative in recoveries
  • Hard to quantify the costs and benefits of an accommodative strategy
  • Maintaining accommodation for too long could have costs
  • Forward guidance may be needed again by central banks
  • Costs could include financial instability and inflation


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