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The Problem with Janet Yellen's Recovery Outlook


For starters, she supports inflation targeting.


One thing I like about Janet Yellen is that unlike Bernanke and Greenspan, she speaks understandable English and isn't prone to sugar-coating everything. I disagree with much of what she says, but not all of it.

Please consider these excerpts from Janet Yellen's Outlook for Recovery in the US Economy.

Key Quotes

  • "As painful as this recession has been, I believe that we succeeded in avoiding the second Great Depression that seemed to be a real possibility."

  • "I regret to say that I expect the recovery to be tepid."

  • "Even if the economy grows as I expect, things won't feel very good for some time to come. In particular, the unemployment rate will remain elevated for a few more years, meaning hardship for millions of workers."

  • "My own forecast envisions a far less robust recovery, one that would look more like the letter U than V. A large body of evidence supports this guarded outlook."

  • "Unfortunately, more credit losses are in store even as the economy improves and overall financial conditions ease."

  • "Certainly, households remain stressed. In the face of high and rising unemployment, delinquencies and foreclosures are showing no sign of turning around. Even recent-vintage loans are experiencing rising delinquency rates."

  • "The chances are slim for a robust rebound in consumer spending, which represents around 70% of economic activity. Consumers are getting a boost from the fiscal stimulus package. But this program is temporary."

  • "It may well be that we are witnessing the start of a new era for consumers following the traumatic financial blows they have endured. While certainly sensible from the standpoint of individual households, this retreat from debt-fueled consumption could reduce the growth rate of consumer spending for years."

  • "My business contacts indicate that they will be very reluctant to hire again until they see clear evidence of a sustained recovery, and that suggests we could see another so-called jobless recovery in which employment growth lags the improvement in overall output."

Additional Highlights

"Normally, if credit flows were restricted by these types of financial headwinds, the Fed would ease the stance of monetary policy by cutting its federal funds rate target. But the funds rate is already at zero for all practical purposes, leaving the Fed's traditional policy tool as accommodative as it can be.

"Many versions of the Taylor rule, a well-known policy benchmark based on the state of the economy and inflation, indicate that we should lower the funds rate well below this zero bound -- if such a thing were possible.

"This brings me to the complex topic of inflation. In my career, I have never witnessed a situation like the one that exists now, when views about inflation risks have coalesced into two diametrically opposed camps. On the one hand, one group worries about the long-term inflationary implications of a seemingly endless procession of massive federal budget deficits. At the same time, others fear that economic slack and downward wage pressure are pushing inflation below rates that are considered consistent with price stability and even raising the specter of outright deflation.

"This dichotomy is on display among the participants in the Survey of Professional Forecasters. The lowest quartile of forecasters focuses on disinflation over the next five years. The top quartile is preoccupied with the possibility of rising inflation five to ten years out.

"My personal belief is that the more significant threat to price stability over the next several years stems from the disinflationary forces unleashed by the enormous slack in the economy.

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