Washington: Federal Reserve Chair Janet Yellen said Friday that the slow recovery from the Great Recession has surprised economists, confounding long-held beliefs about growth and inflation. Her remarks could help explain why the Fed has been reluctant to raise US interest rates.
Speaking to an economic conference at the Federal Reserve Bank of Boston, Yellen did not address the Fed’s timetable for rates. The central bank is widely expected to resume raising rates in December, a reflection of an improved economy.
Yellen said sluggish worldwide growth would likely keep global interest rates low, making it harder for central banks to combat the next recession with rate cuts.
As with the aftermath of the Great Recession, Yellen noted that economists have at times been baffled by the economy’s refusal to comply with their expectations — during the Great Depression of the 1930s, for example, and the “stagflation” of the 1970s when high unemployment coexisted with high inflation.
The aftermath of the 2007-2009 crisis has “revealed limits in economists’ understanding of the economy,” the Fed chair suggested. Tumbling home prices reduced consumers’ willingness to spend more than economists had envisioned. And a steady decline in the unemployment rate has failed to lift wages and inflation as much as economic models would indicate.
Yellen’s comments amounted to an implicit defence of the Fed’s aggressive efforts to boost the American economy in the aftermath of the recession. The Fed kept short-term rates near zero for seven years and launched three bond-buying programmes to try to shrink longer-term rates, too, to stimulate borrowing and spending.
Yellen said the sluggish recovery suggests that “it is even more important for policymakers to act quickly and aggressively in response to a recession” and that policymakers might need to provide more stimulus “during recoveries than would be called for under the traditional view.”
After raising its benchmark short-term rate in December, the Fed had been expected to increase rates again several times this year. But it has instead left rates alone, citing persistent uncertainty about the economic outlook.