U.S. Federal Reserve Chair Janet Yellen smiles as she begins her talk at the University of Massachusetts in Amherst, Massachusetts September 24, 2015. Yellen said on Thursday she expects the U.S. central bank to begin raising interest rates later this year as long as inflation remains stable and the U.S. economy is strong enough to boost employment. REUTERS/Mary Schwalm

Federal Reserve Chair Janet Yellen never delivered some of the juiciest parts of her speech on Thursday.

That’s because they were hidden in the footnotes, of which there were more than 34. It was an important but highly academic speech arguing for the start of withdrawing the Fed’s extraordinary support for the economy this year and an explanation of why the factors holding back inflation in America will soon fade. But it was also abundant with trenchant asides that underscore Yellen’s reputation as particularly thorough economist. We’ve compiled some of them below:

Footnote No. 5: Why the Fed won’t set a target for unemployment
The central bank is responsible for two things: achieving maximum employment and price stability. The Fed has set a target for inflation at 2 percent, and some have suggested it choose one for unemployment as well. New legislation introduced on Capitol Hill by Michigan Rep. John Conyers would require the central bank to aim for an unemployment rate of about 4 percent.

Yellen dismissed that idea:

The maximum level of employment is something that is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. Moreover, the maximum level of employment, the longer-run “natural” rate of unemployment, and other related aspects of the labor market are not directly observable, can change over time, and can only be estimated imprecisely.

Footnote No. 13: Why low inflation is bad
Former Fed Chair Ben S. Bernanke once said that the problems with low inflation are difficult to explain to your uncle. High unemployment is obviously bad. High inflation is also obviously bad. But low inflation? Who doesn’t want to pay less for the things they want?

Yellen tries to break it down:

Very low inflation also can result in chronically higher unemployment by closing off an important way in which the labor market can respond to adverse shocks. In sectors where productivity is lagging or demand is slowing, declines in real wages might be necessary to avoid even worse outcomes, such as layoffs. For various reasons, however, employers often try to avoid nominal wage cuts.

In other words, many firms are loathe to reduce employee salaries even when it’s necessary to stay in business. So they let inflation do the work for the, leaving wages unchanged even when prices rise. The result is a pay cut in real terms, even though the nominal wage remains the same. And that’s why low inflation can actually force businesses to lay off more people.

But when inflation falls to a very low level, this passive approach to wage reductions may no longer be viable for many firms, causing relatively more of the burden of adjustment to fall on employment.

Footnote No. 14: Inflation target takedown, part 1
We’ve covered why the Fed won’t set 4 percent as a target for unemployment. Should it change its inflation target to 4 percent?

That has become an increasingly popular argument among those who believe the Fed should be doing more to stimulate the economy. Yellen is dubious of the idea:

It is not obvious that a modestly higher target rate of inflation would have greatly increased the Federal Reserve’s ability to support real activity in the special conditions that prevailed in the wake of the financial crisis, when some of the channels through which lower interest rates stimulate aggregate spending, such as housing construction, were probably attenuated. Beyond these tactical considerations, however, changing the [Fed’s] long-run inflation objective would risk calling into question the [Fed’s] commitment to stabilizing inflation at any level because it might lead people to suspect that the target could be changed opportunistically in the future.

If so, then the key benefits of stable inflation expectations discussed below--an increased ability of monetary policy to fight economic downturns without sacrificing price stability--might be lost. Moreover, if the purpose of a higher inflation target is to increase the ability of central banks to deal with the severe recessions that follow financial crises, then a better strategic approach might be to rely on more vigorous supervisory and macroprudential policies to reduce the likelihood of such events.

Oh, she’s not done. This is still the same footnote, by the way.

Inflation in the vicinity of 4 percent or higher would stretch the meaning of “stable prices” in the Federal Reserve Act.

Footnote No. 15: You haven’t felt the full force of the Fed yet
This footnote includes only a brief mention of a paper released earlier this year by senior Fed economists Eric Engen, Thomas Laubach, and Dave Reifschneider. But it’s fascinating research that is a rabbit hole in itself.

The authors attempt to estimate the impact of the Fed’s extraordinary stimulus on the real economy. What have seven years of zero percent interest rates, a $4 trillion balance sheet and lots of promises by the Fed actually achieved? From the paper:

Our analysis implies that the peak unemployment effect—subtracting 11⁄4 percentage points from the unemployment rate relative to what would have occurred in the absence of the unconventional policy actions—does not occur until early 2015, while the peak inflation effect—adding 1⁄2 percentage point to the inflation rate—is not anticipated until early 2016.

In other words, the Fed unleashed its easy money policies in late 2008 but they are only now coming to fruition. Indeed, the paper estimates that the Fed’s efforts had almost no impact early on, though they caution that factors such as consumer and business confidence are difficult to measure and not directly included in their calculations.

First, the model estimates that the FOMC’s unconventional policy actions provided essentially no stimulus in the first two years following the financial crisis, in that the simulation shows the unemployment rate peaking at the same level and real GDP growth and inflation essentially unchanged through 2010.

Second, the FOMC’s actions do appear to have appreciably sped up the pace of recovery beginning in 2011, with the model predicting a substantially slower decline in the unemployment rate after that point in the absence of forward guidance and asset purchases, accompanied by lower inflation. Third, the model estimates that we are only now approaching the full effects of unconventional policy on real activity and inflation.

This chart from the paper shows their estimates of what the economy would have looked like without the Fed’s stimulus compared to what we actually got.

Source: Federal Reserve

Footnote No. 28: Inflation target takedown, part 2
Yellen comes back to the idea of a 4 percent inflation target to bash it some more.

I am somewhat skeptical about the actual effectiveness of any monetary policy that relies primarily on the central bank’s theoretical ability to influence the public’s inflation expectations directly by simply announcing that it will pursue a different inflation goal in the future. Although such announcements might potentially persuade some financial market participants and professional forecasters to shift their expectations, other members of the public are probably much less likely to do so. Hence, actual inflation would probably be affected only after the central bank has had sufficient time to concretely demonstrate its sustained commitment and ability to generate a new norm for the average level of inflation and the behavior of monetary policy--a process that might take years, based on U.S. experience.

Consider the mic dropped.

Footnote No. 29: The ‘70s are over.
A good chunk of Yellen’s speech focuses on the challenge of taming inflation that the Fed faced in the 1970s. During that time, rising wages helped push up the price of goods, which in turn led workers to demand higher wages, creating a vicious cycle that became known as the “wage-price spiral.”

Today, wage growth is stagnant, but some have argued that the wage-price spiral could quickly emerge as the economy strengths and lead to a rapid uptick in inflation – especially since the Fed’s policy has been so loose. But Yellen appears ready to bury that old theory.

The wage-price spiral no longer seems to provide a useful description of the U.S. inflation process. In fact, some evidence suggests that, like inflation, the rate of growth of labor costs is now characterized by a stable long-run trend.

More generally, movements in labor costs no longer appear to be an especially good guide to future price movements. (This development does not imply that wage developments carry no useful information: Because wage growth is influenced by labor market slack, observed movements in compensation gains can provide an indication of how close the economy is to full employment.)

Figure 8: Factors holding back inflation
This is a useful chart showing the factors that have held back inflation over time. It clearly shows that low inflation is no longer primarily due to a weak economy. Instead, it’s mainly the result of falling energy prices and a stronger dollar that has reduced the cost of imports. This is a key reason why the Fed believes that inflation will eventually return to 2 percent – and why it still expects to raise its benchmark interest rate this year.

Source: Federal Reserve