Federal Reserve Chair Janet Yellen said there are “plausible ways” that running the US economy hot could fix damage caused by the Great Recession, laying out the argument for keeping monetary policy easy without taking an interest-rate hike off the table this year.
“Increased business sales would almost certainly raise the productive capacity of the economy by encouraging additional capital spending,” Yellen told a Boston Fed conference Friday dedicated to examining the elusive economic recovery. “A tight labor market might draw in potential workers who would otherwise sit on the sidelines.”
US stocks fluctuated after her remarks as investors digested a speech that lacked specific observations on the outlook for the economy and monetary policy, but which may have come across as an explanation of the Fed Chair’s dovish policy position.
“If nothing else, this is another lower-for-longer prescription. However, these comments do not preclude a 25-basis-point rate hike this year as another step in the normalization process,” Thomas Simons, senior economist at Jefferies LLC in New York, wrote in a note to clients.
Minutes of the Sept. 20-21 meeting of the Federal Open Market Committee showed that “several” members of the central bank’s policy-setting panel judged that it would be appropriate to raise the benchmark lending rate “relatively soon.” Pricing in federal funds future contracts indicates that investors see a roughly two-thirds probability of a move in December versus less than 20 percent next month, when the FOMC meets a week before the U.S. presidential election.
The US economic recovery that began in the middle of 2009 has proceeded at sluggish pace. It took more than six years to drive the unemployment rate close to Fed officials’ definition of full employment. Inflation has remained below the Fed’s 2 percent target since 2012, and wages haven’t grown as fast as in previous expansions. Economists at the Boston Fed conference scrutinized explanations for the slow recovery, with some arguing that demographic trends already in place before the recession are largely to blame.
Yellen pondered whether a “high-pressure economy” could reverse some of the damage done in the recession, including declines in research spending and labor force participation. In effect, that has been the Federal Open Market Committee’s bet this year, though Yellen cautioned that running a low-rate policy for too long “could have costs that exceed the benefits” by increasing financial risk or inflation.