Fed member Yellen in a speech on the US economy is covering all her bases. In the first part of the speech she is optimistic that growth will resume sometime this year due to an improvement in the capital markets, signs of stabilization in housing and consumer spending, a slowing rate of contraction in job losses, and an end to the massive inventory destocking seen in Q4 and Q1. In addition to this, “expansionary” fiscal and monetary policy will also fuel growth. She does caveat her comments by saying the “recovery is likely to be painfully slow” and there “remains some chance that economic conditions could turn out worse than what I’ve sketched.” Her dovishness on inflation is evident with her belief that core inflation will remain below 2% “for several more years” as she thinks there is no good fundamental reason for inflation right now (she thus believes that the economy will rebound without any rise in inflation from here since the core rate never got below 1.7% during the worst economic crisis in 70 years). She said the Fed must be ahead of the curve with rate hikes but now is not the time for hikes. She also said in the Q&A that the Fed won’t repeat the policy mistakes of the ’60s and ’70s as the Fed’s enlarged balance sheet won’t fuel inflation. As I said right after her last speech in June, with gold just 6.5% below $1000, someone will be wrong. Will it be the economist or the market?
Fed member Yellen
July 28, 2009 2:22pm by
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