Federal Reserve Chair Janet Yellen has become overly optimistic about the state of the US job market, a stance that risks undermining the recovery her low-interest-rate polices have supported.
"Every measure of the labor market, whether it's the narrow unemployment rate, the broader unemployment rate, the number of people working in part-time jobs who want full time work, the level of job openings, the quit rate, the difficulty that firms are facing in hiring workers, the level of confidence we see in surveys about the labor market, all of that is pointing to vast and continuing improvement in the labor market," Yellen told reporters.
But the Phillips Curve, and their stubborn adherence to it, makes officials believe an inflation spike is just around the corner — even if such fears have proven misguided year after year.
But in the same breath she curiously added that "if we don't do anything to remove policy accommodation, and the labor market tightens … we think the economy could overheat, inflation could rise more quickly and above our objective … and that would force us later on to tighten policy more rapidly than would be ideal, and we could risk a recession if we did that." That is, according to Yellen, the Fed needs to prematurely tighten policy now so they don't have to tighten more quickly if the economy gets too hot in the future.
The central goal of the Fed's easy monetary policy over the last several years, whether low interest rates or bond purchases, was ultimately to help the average American bounce back from the deepest recession in generations.