US: Benefits of running a high-pressure economy – Goldman Sachs

Research Team at Goldman Sachs, notes that both the September FOMC minutes and a speech by Fed Chair Janet Yellen hinted at an emerging debate within the Fed about the potential merits of running a “high-pressure economy and these benefits are listed below.

Key Quotes

“We examine two types of benefits: Repairing the supply side of the economy after a deep recession, and aiding groups of workers who face disadvantages in the labor market. We are not convinced that a very hot labor market would meaningfully raise aggregate supply, either by sharply raising labor force participation or by boosting productivity. While the evidence that a high-pressure economy would help low-wage workers and the long-term unemployed is more compelling, whether such benefits would outlive the cycle is less clear.

Fed officials who strongly believe that running a high-pressure economy risks shortening the duration of the expansion are unlikely to be persuaded. But for others, the policy might look more like a trade-off between potential risks and benefits that are both meaningful but only modestly likely. We take last week’s comments as a sign that this is a live debate on the FOMC, one that could have important implications for the pace of tightening next year and beyond.”