(Note: Both comprise a body of beliefs and related practices. For example: Scientology teaches that people are immortal beings who have forgotten their true nature. Its method of spiritual rehabilitation is a type of counselling known as auditing, in which practitioners aim to consciously re-experience painful or traumatic events in their past in order to free themselves of their limiting effects.)
Yellen´s speech today, the first as Chair of the Federal Reserve has been extensively parsed. To minimize the risks of repeating what others have certainly written, what struck me was how, despite the subtext of her speech being how much the Fed is committed to support the recovery, that final goal is still far away:
In sum, the central tendency of FOMC participant projections for the unemployment rate at the end of 2016 is 5.2 to 5.6 percent, and for inflation the central tendency is 1.7 to 2 percent.2 If this forecast was to become reality, the economy would be approaching what my colleagues and I view as maximum employment and price stability for the first time in nearly a decade. I find this baseline outlook quite plausible.
In summary, the policy framework I have described reflects the FOMC’s commitment to systematically respond to unforeseen economic developments in order to promote a return to maximum employment in a context of price stability.
It is very welcome news that a return to these conditions has finally appeared in the medium-term outlook of many forecasters. But it will be much better news when this objective is reached. My colleagues on the FOMC and I will stay focused on doing the Federal Reserve’s part to promote this goal.
Let´s look at some statistics. The average span of expansions between 1945 and 1982 was 31 months. If we take the end of 2016 as coinciding with the end of this expansion, it will have been going on for 90 months or almost three times longer than the average length of expansions in the 1945-82 period!
But note that the average length of expansions during the Great Moderation – 1983 -07 – was 92 months (with a maximum of 120 months in the 1991-01 expansion).
That meshes well with the thought being put forth that we are in a “Great Moderation” 2.0, where growth (both nominal and real) and inflation volatilities are just as low as during the “Great Moderation” 1.0.
If so that also implies that policymakers have “chosen” to keep the economy trapped in what is being called a “Great Stagnation”, a path that is distancing itself quarter by quarter from a more suitable and attainable level path. And given path-dependency, there will come a time when the “Great Stagnation” will become not the “new” but simply the “normal” state of affairs.
I never tire to illustrate this scenario because it´s the best pointer to where we´re going!
By the end of 2016 inflation and unemployment may be hugging their respective “ideals”. But the economy itself will be a whole different animal from what it was in the post-war to 2007, and particularly, despite similar volatilities, very different from what it was during the GM 1.0.