On Wednesday, as expected, the Federal Reserve raised short-term interest rates by a quarter of a percentage point, to 1.25 per cent.
First, she conceded that the Fed isn’t really sure why, despite a sharp fall in the rate of unemployment, the rate of consumer-price inflation is lagging behind the Fed’s target rate of two per cent.
As the jobless rate dropped from 5.3 per cent, last May, to 4.8 per cent, in January, the inflation rate picked up a bit, which was consistent with a NAIRU in the range of five per cent.
That suggests that the NAIRU might well be much lower than five per cent, and it raises the question of why the Fed is still raising interest rates.
Yellen also argued, as she has done since the Fed started raising interest rates at the end of 2015, that the central bank’s policymakers were simply following the prudent path.