Wednesday, September 30, 2015

Stop-go policy possibility in future

If we maintain a highly accommodative monetary policy for a very long time from here and the economy performs as we expect, namely, it's strong and the risks that are out there don't materialize, my concern will be that we will have much more tightening in labor markets than you see in these projections. And the lags will be probably slow. But eventually we will find ourselves with a substantial overshoot of our inflation objective. And then we'll be forced into a kind of stop-go policy. We will have pushed the economy so far it will have become overheated. And we will then have to tighten policy more abruptly than we like. And instead of having slow, steady growth, improvement in the labor market. 

And continued improvement and good performance in the labor market, I don't think it's good policy to then have to slam on the brakes and risk a downturn in the economy.