The Federal Reserve may need to run a "high-pressure" economy in order to reverse damage from the crisis that depressed output, sidelined workers and risks becoming a permanent scar, Fed Chair Janet Yellen has said in a broad review of where the recovery may still fall short.
Though not addressing interest rates or immediate policy concerns directly, Yellen's lunch address on Friday to a conference of policymakers and top academics laid out the deepening concern at the Fed that US economic potential is slipping - and may need aggressive steps to rebuild it.
The question, Yellen said, is whether that damage can be undone "by temporarily running a 'high-pressure economy,' with robust aggregate demand and a tight labour 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," Yellen said.
"In addition, a tight labour 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."
US stocks posted further gains after Yellen's remarks, while the dollar dropped and Treasuries rose, pushing yields on the 2-year note to session lows.
Her remarks, while pointing largely to research she feels needs to be done, nevertheless add an important voice to a debate that is intensifying within the Fed over whether the economy is close enough to normal to need steady rate increases, or whether it remains subpar and scarred.
That could figure importantly in coming debates over rate policy, and over whether support is building at the Fed to risk letting inflation move above its 2 per cent target in order to employ more workers and perhaps encourage more investment.
From weak inflation to the effect of low interest rates on spending, little in the economy has been acting as the Fed expected.
