But her staff reran the exercise last month and concluded that with unemployment so much lower, the optimal policy is to start raising rates immediately, even though inflation is below target.The Fed's apparent willingness to tighten with inflation so low rests on the assumption that it will slowly return to target thanks to a tightening labour market and stable expectations of inflation.
Of course, the Fed might wait too long to tighten and inflation could eventually rise above the 2% target.
Monetary policymakers feared these excess reserves would make it difficult to tighten if inflation developed or if "speculative excess" began again on Wall Street.
The Fed has already promised not to raise rates so long as unemployment is at least 6.5%; Ms Yellen will add a new condition: no tightening if inflation is projected to stay below 2%.This could easily go wrong.
In Britain, where above-target inflation was the norm for much of the recovery, consumer prices rose at just 1.7% in the year to February.Central banks could do a world of good simply by promising not to tighten until inflation is back on target.
When shocks or slowdowns occur, then, the economy will quickly fall back to the zero lower bound, forcing the Fed to either reach for unconventional policy or accept a longer and more painful downturn (or a bit of both).Moving toward tightening while inflation is below target and interest rates are at zero is just remarkably short-sighted.
After a few months of tightening, Indias inflation, which hit a 13-year high in June, appears to have stabilized.
A new Governor of the Bank of Japan, less concerned with supporting the U.S. dollar and more concerned with fighting inflation, tightened monetary policy, which led to a sharp increase in interest rates in early 1990.
Thus, even if the economy grows rapidly over the next year or so (and it may not), there will still be plenty of slack, putting further downward pressure on inflation.At the end of previous recessions, inflation was also much higher than today, so as growth perked up monetary policy needed to be tightened swiftly to stop inflation rising.
Controls on international financial transactions, which already badly squeeze Iranian traders and have fuelled galloping inflation, have tightened again in recent weeks.
By this time, the 1980s boom was coming to a rapid and painful end as interest rates were tightened to combat rising inflation.
