Wednesday, March 04, 2015

Yellen in June 2009: Sluggish Recovery, Low inflation for "few years"

by Bill McBride on 3/04/2015 10:40:00 AM

The Federal Reserve released the transcripts for the 2009 FOMC meetings today. Here is SF Fed President Janet Yellen in June 2009:

Thank you, Mr. Chairman. At our meeting in late April, we had begun to see hopeful signs of impending economic recovery, and subsequent economic and financial developments have strengthened the view that the economy is bottoming out. Even so, the outlook over the next several years remains disturbing. My modal forecast shows economic growth resuming next quarter, but I expect the recovery to be quite gradual. The output and employment gaps are, at a minimum, quite large, so it will take a long time to regain full employment under current monetary and fiscal policy settings. Although downside risks have diminished, I remain concerned that the recovery is still fragile.
...
And, of course, labor markets continue to deteriorate badly. It’s a sign of how bad things really are that near euphoria broke out with the announcement of 345,000 nonfarm jobs lost in May. The unemployment rate is soaring month by month, and, even worse, it appears to understate the true extent of the deterioration, given the unusually high incidence of permanent, as opposed to temporary, layoffs, and the unprecedented increase in involuntary part-time work. ...

My forecasts for output and employment are similar to the Greenbook’s, so I won’t go into the details. I do want to emphasize that I anticipate a rather sluggish recovery, not the rapid V-shaped recovery we have frequently seen following deep recessions in the past. The process of balance sheet repair that households and financial institutions are undergoing will result in subdued spending for an extended period, and monetary policies here and abroad are not able to play as big a role as usual in promoting recovery because of the constraint of the zero lower bound on short-term interest rates.

... [E]ven under the typical recovery simulation, which has much stronger growth than in the baseline, the unemployment rate remains well above the 5 percent NAIRU by the end of 2011, and inflation hovers around 1 percent. This outcome reflects the large unemployment and GDP gaps estimated for the first quarter. ...

So, to conclude, if the recovery is as slow as the Greenbook and I expect, it will take quite a number of years to get back to potential output. As a result, I expect core inflation to drift lower over the next few years, falling below the 2 percent rate that seems best to me.
Note that Yellen correctly forecast that the recovery was starting (this was June 2009), but that the recovery would be sluggish - not V-shaped - because of the need for "balance sheet repair" (I made the same argument in mid-2009), and that inflation would be low for some time. Many analysts were forecasting a strong recovery (ignoring the reasons for the recessions) and high inflation.