Tuesday, July 17, 2018
Business

Fed's Yellen: Slow recovery confounds economists' expectations

WASHINGTON — Federal Reserve chairwoman 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 U.S. 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 will 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 co-existed 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 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."

In December, the Fed raised short short-term U.S. rates from near zero, where it had kept them for seven years. Fed policymakers had been widely expected to raise rates several times this year, but they have not, citing persistent uncertainty about the economic outlook.

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