In a speech at the Economic Club of New York on Wednesday, Yellen noted that the Fed's monetary policy committee's latest projections were for the unemployment rate to fall within the range of what officials think is full employment for the U.S., 5.2 to 5.6 percent, by the end of 2016, and for inflation to rise to about 1.7 to 2 percent.
If that forecast comes true, Yellen noted, it mean that the economy had achieved “maximum employment” and stable inflation “for the first time in nearly a decade.” That scenario, she said, is “quite plausible.”
Yellen ended her speech by saying that it is “very welcome news” that a return to full employment has “finally appeared in the medium-term outlook of many forecasters.”
Nevertheless, the end of 2016 remains a long way off.
By December 2016, it will have been 90 months since the official end of the recession (as dated by the National Bureau of Economic Research) in June 2009.
An economic expansion of that length would be more than twice the length of the average expansion, which is about 39 months, according to the NBER. In the postwar period, it’s longer: 58 weeks. The average time from trough to trough for the postwar period is 70 months, meaning that by the time the U.S. reached the projection for full employment in Yellen’s “plausible” scenario, it would have been overdue for a recession by almost two years.
It was Yellen’s first major speech on monetary policy since becoming chairwoman of the Fed in February, and otherwise she made little news, reaffirming the central bank’s commitment to making its ongoing stimulus efforts responsive to economic developments.
By speaking clearly about the fact that the quantitative easing and zero-rate forward guidance programs are dependent on economic data, Yellen said, the Fed’s monetary policy will have an "automatic stabilizer" effect that operates through private-sector expectations. In other words, businesses will come to expect more stimulus and lower rates from the Fed if the economy weakens, but less if it performs better than expected.
Asked by former Reagan economic adviser Martin Feldstein how she would avoid holding rates too low for too long and risking elevated inflation, Yellen noted that currently, with inflation near just 1 percent rather than the Fed’s 2-percent target, the risk is undershooting on inflation. But she added that wage inflation “can be an early warning indicator of an uptick” in price inflation, and she will monitor upward pressures on wages in particular.