« The Middle Class Risk-Return Tradeoff | Main | Paul Krugman: Whining Over Discontent »

Thursday, September 07, 2006

Are We There Yet?

San Francisco Fed President Janet Yellen indicates that, as of now, she sees no reason to raise rates further:

Support for Fed Pause Was Broad Among the 12 Regional Banks, by Greg Ip, WSJ: Just two of the Federal Reserve's 12 regional banks [Richmond and Philadelphia] wanted to raise interest rates ahead of the central bank's policy meeting last month, suggesting support for the Fed's rate "pause" is relatively broad...

The Fed discount-rate minutes add to the evidence that the Fed is willing to leave rates alone for the time being to see how growth and inflation evolve. ... Janet Yellen added to that sentiment Thursday, telling an audience ... that "it appears that the current stance of policy will move inflation gradually back to the comfort zone while giving due consideration to the risks to economic activity." Markets put just a 11% probability on a rate increase at the Fed's Sept. 20 meeting. ...

In her speech, Ms. Yellen said inflation still is uncomfortably high and as long as it is, the Fed has a bias to raising rates further. "However, our past actions have already put a lot of firming in the pipeline. With the lags in policy we haven't yet seen the full effect of our past actions. These will unfold gradually over time. By pausing, we allowed ourselves more time to observe the data and more time to gauge how much, if any, additional firming is needed to pursue our dual mandate."

Ms. Yellen argued that inflation is likely to come down in the coming year because of slower growth and flattening energy prices. In addition, she said that research at the San Francisco Fed has found that in the last decade inflation has shown a greater tendency to revert to its long-run average.

That runs contrary to the conventional finding that inflation, once it rises or falls, has a strong tendency to persist ... "This evidence is important because, if it holds up, it implies that inflation may move down from its elevated level faster than many forecasters expect," she said.

Yellen's speech is here. William Polley comments here, Calculated Risk covers the housing angle here.  And here's the conclusion to the John Williams paper "The Phillips Curve in an Era of Well-Anchored Inflation Expectations" she refers to:

Conclusion: This analysis provides some suggestive evidence that the standard accelerationist Phillips curve may no longer provide a reasonable description of the behavior of inflation in an era where inflation expectations are well anchored. Inflation appears to have become far less persistent in the past decade than it was in the preceding decades. This finding is consistent with the prediction of theoretical models when monetary policy systematically acts to stabilize inflation around a constant long-run target and has credibility with the public. ...  This conclusion is admittedly quite tentative. ... Importantly, even taken at face value, this evidence regarding possible shifts in the coefficients of the Phillips curve may ... not correspond to any change in the true structure of the economy. Therefore, the recent low level of inflation persistence cannot be taken as given in designing monetary policy: if policy acts in ways to create a high degree of inflation persistence, then the public’s expectations would eventually shift to reflect that reality.

    Posted by on Thursday, September 7, 2006 at 04:43 PM in Academic Papers, Economics, Fed Speeches, Monetary Policy | Permalink  TrackBack (0)  Comments (0)


    TrackBack URL for this entry:

    Listed below are links to weblogs that reference Are We There Yet?:


    Feed You can follow this conversation by subscribing to the comment feed for this post.