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Yellen Raises the Possibility of a “High-Pressure” Economy

Phil Hall
Oct 14, 2016

Federal Reserve Chairwoman Janet Yellen took a dramatic departure from her usual talking points to wonder aloud if a "high-pressure" economy would be able to erase the lingering economic wreckage created by the 2008 crash.

According to a Reuters report, Yellen used a speech today before an economics conference to outline potential solutions to the continued problems that have prevented a complete recovery from the last recession. Yellen stated whether a fix could be achieved "by temporarily running a 'high-pressure economy,' with robust aggregate demand and a tight labor market. One can certainly identify plausible ways in which this might occur. Increased business sales would almost certainly raise the productive capacity of the economy by encouraging additional capital spending, especially if accompanied by reduced uncertainty about future prospects. In addition, a tight labor market might draw in potential workers who would otherwise sit on the sidelines and encourage job-to-job transitions that could also lead to more efficient—and, hence, more productive—job matches. Finally, albeit more speculatively, strong demand could potentially yield significant productivity."

Yellen did not speculate on what this scenario would mean for the housing market, which has seen home prices rising far ahead of wages. Nor did she address what has become the new guessing game in economic political circles: when will the Fed start to raise interest rates with greater regularity? Instead, her comments pointed to a new toolbox that central bankers would be able to use in the event that the 2008 situation were to happen again.

"If strong economic conditions can partially reverse supply-side damage after it has occurred, then policymakers may want to aim at being more accommodative during recoveries than would be called for under the traditional view that supply is largely independent of demand," Yellen said, adding that it would "make it even more important for policymakers to act quickly and aggressively in response to a recession, because doing so would help to reduce the depth and persistence of the downturn." 

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