But minutes from the meeting released this week showed several officials were ready to hike “relatively soon” unless the economy weakens. Investors are betting the Fed will raise rates in December, its last meeting of the year.
Yellen did not provide any hints about the central bank’s thinking. Instead, she focused her remarks on the ways that the Great Recession — and the unexpectedly slow growth that has followed — could reshape economic thinking.
“Extreme economic events have often challenged existing views of how the economy works and exposed shortcomings in the collective knowledge of economists,” Yellen said.
Among the questions raised were whether the severe downturn could erode the skills of the nation’s workforce, impeding future growth. Yellen also suggested that changes in spending and behavior among some groups could have outsize effects on the health of the broader economy — a nuance that current mathematical models may not capture well.
“Even though the tools of monetary policy are generally not well suited to achieve distributional objectives, it is important for policymakers to understand and monitor the effects of macroeconomic developments on different groups within society,” Yellen said.
Another crucial question concerned how much policymakers understand about how inflation works, such as its relationship to the labor market and the way businesses forecast prices increases. Yellen also called for more research into how financial markets affect the real economy and how the Fed’s interest rate decisions affect other countries.
The central bank has grown increasingly sympathetic to the possibility that economic growth will remain tepid for years to come. As a result, Fed officials have lowered their expectations for how much they will raise interest rates in the future. The median estimate is now 3 percent, down from more than 4 percent when the Fed first published its projections in 2012.
Central bank officials are debating the best strategy for approaching such a slow recovery. In minutes of the Fed’s meeting last month, some argued against raising rates to give the job market time to strengthen while inflation remains low. Hiring has been remarkably solid this year, and many workers are joining the labor force.
“If strong economic conditions can partially reverse supply-side damage after it has occurred, then policymakers may want to aim at being more accommodative during recoveries than would be called for under the traditional view that supply is largely independent of demand,” Yellen said Friday.
Those officials also advocated keeping rates unchanged because the economy remains vulnerable and the central bank has limited scope to prop it back up if a recession strikes again.
But others point to the country’s low unemployment rate of 5 percent, an uptick in wages and signs that inflation could be picking back up as reasons that rates should rise. Three officials — Boston Fed President Eric Rosengren, Kansas City Fed President Esther George and Cleveland Fed President Loretta Mester — dissented from the central bank’s decision to keep rates unchanged last month. Rosengren has also warned that years of ultralow interest rates could be distorting some financial markets, particularly commercial real estate.
“The benefits and potential costs of pursuing such a strategy remain hard to quantify,” Yellen said of keeping rates unusually low. “Other policies might be better suited to address damage to the supply side of the economy.”
Although Fed officials may still be debating the precise timing of a rate hike, they largely agree that future increases will probably be made gradually. Officials have repeatedly emphasized that they will raise rates more quickly if the economy picks up speed but also slow down if the recovery proves weaker than expected.
So far, the latter has prevailed.
“This recovery has been full of surprises, most of which have not been good,” Rosengren said Friday in Boston. “The lessons from this recovery — perhaps an understanding of a 'new normal' environment — may very well impact how we should be thinking about monetary policy going forward.”