Fed's Yellen sees possible benefits from running economy with tight labor market


Federal Reserve Chairwoman Janet Yellen spoke in favor of a ‘high-pressure’ economy.

BOSTON (MarketWatch) – It may be wise to run a “high pressure” economy with a tight labor market to reverse some of the negative effects of the Great Recession, Fed Chairwoman Janet Yellen said Friday.

In a speech at a Boston Fed conference on the “not-so-great recovery,” Yellen said a disappointing economy may force economists to think about the economy in new ways.

Prior to the crisis, most economists thought the amount of output of goods and services was primarily driven by supply, Yellen said. “This conclusion deserves to be reconsidered in light of the failures of the level of economic activity to return to its pre-recession trend in most advanced economies,” the Fed chairwoman said.


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Her remarks suggest that Yellen agrees, at least in some part, with former Treasury Secretary Larry Summers, who said that secular stagnation, or a lack of demand, is pushing down global growth.

If one assumes that demand is holding back outlook, “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,” Yellen said.

Policy makers want to keep policy more easy during recoveries than would be called for under the traditional view that supply is largely independent of demand, she said.

At the same time, Yellen noted an easy interest rate stance “could have costs that exceed the benefits by increasing the risk of financial instability or undermining price stability.”

The strategy remains hard to quantify, and other policies might be better suited to address damage to the supply side of the economy, the Fed chairwoman added.

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Published at Fri, 14 Oct 2016 17:35:56 +0000