While little is expected from Janet Yellen’s speech today with regard market-moving news, the topic shooul be good for a laugh…“The Elusive ‘Great’ Recovery.”
There was one thing that ‘recovered’…
And the real economy “gets nothing”
If Yellen opts to comment on monetary policy at Friday’s speech, she is largely expected to reiterate the message that “all meetings are live”.
The market’s focus is on the phrase “high-pressure eonomy” as per:
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.
The phrase was recently used in a CBPP report from March 2015 as follows:
Expansionary policy can create what Arthur Okun called a “high-pressure economy,” one with stronger-than-average economic growth and low unemployment. A high-pressure economy would create jobs for people who otherwise might be chronically unemployed, and push output back toward its pre-recession trend… though a high-pressure economy would probably push inflation above the Fed’s target level, this overshoot would be modest and temporary, and any adverse effects would be slight compared to the gains in employment and output.
Some have interpreted this as a hint that Yellen is bringing back a hint of dovishness.
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As MNI notes, regarding Yellen’s speech, while a better understanding of exactly how inflation expectations are formed, Federal Reserve Chair Janet Yellen said Friday both actual and expected inflation measures are important for monetary policymaking and are tied to central bankers targets.
“We need to know more about the manner in which inflation expectations are formed and how monetary policy influences them,” Yellen said in a speech prepared for the Federal Reserve Bank of Boston’s 60th Economic Conference.
“Ultimately, both actual and expected inflation are tied to the central bank’s inflation target, whether that target is explicit or implicit.”
Yellen did not comment on the current stance of monetary policy accommodation or when the policymaking Federal Open Market Committee might make another move in the fed funds rate.
Instead, she kept focused on the topic of “Macroeconomic Research After the Crisis,” which includes the need for a better understanding of inflation expectations.
“With nominal short-term interest rates at or close to their effective lower bound in many countries, the broader question of how expectations are formed has taken on heightened importance,” she said.
With many advanced economies struggling with sluggish growth and low inflation, while policy rates are close to their zero lower bound, “many central banks have sought additional ways to stimulate their economies, including adopting policies that are directly aimed at influencing expectations of future interest rates and inflation,” Yellen pointed out.
The “unusually explicit and extended guidance” the FOMC used from 2011 to 2014 and the Bank of Japan’s upward revision to its official inflation objective in 2013 are such policies, she said.
“These and other expectational strategies may be needed again in the future,” she said, “given the likelihood that the global economy may continue to experience historically low interest rates, thereby making it unlikely that reductions in short-term interest rates alone would be an adequate response to a future recession.”
This echoes her Jackson Hole speech in which she outlined monetary policy tools, including forward guidance, that might needed in addition to traditional tools such as rate cuts if the economy were to take a downturn.
Even as some inflation expectations need to be better understood, Yellen points out the “the standard framework for thinking about inflation dynamics used by central bank economists and others prior to the financial crisis remains conceptually useful today.”
She provided a “simple description” of this framework: “Inflation is characterized by an underlying trend that has been essentially constant since the mid-1990s; previously, this trend seemed to drift over time, influenced by actual past inflation or other economic conditions.”
Theory and evidence suggest this trend “is strongly influenced by inflation expectations that, in turn, depend on monetary policy,” she said.
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,” Yellen pointed out.
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,” she said.
She asked “how does this anchoring process occur? Does a central bank have to keep actual inflation near the target rate for many years before inflation expectations completely conform?”
The influence of labor market conditions on inflation, in part recognized in the Phillips Curve, “seems to be weaker than had been commonly thought prior to the financial crisis,” Yellen said, though she has previously said the relationship is somewhat in tact if weaker than previously.
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Also, of note, is that the word recession was used 25 times in the speech.
Yellen’s full speech below (link)