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Mester, Loretta J. on 2018 April 19 at 18:45

Recent research from the Cleveland Fed suggests that a strategy to overheat the economy in an attempt to pull more people back into the workforce is unlikely to have any lasting effect on labor force participation. Yet, overheating would have costs.

t is appropriate to continue to remove some of the monetary policy accommodation to ensure we avoid a build-up in risks to macroeconomic stability that could arise if the economy were allowed to overheat. Recent research from the Cleveland Fed suggests that a strategy to overheat the economy in an attempt to pull more people back into the workforce is unlikely to have any lasting effect on labor force participation. Yet, overheating would have costs — it would necessitate sharper rate increases that could in themselves be destabilizing. A gradual upward path of interest rates should also help to avoid financial imbalances and a potential build-up of financial stability risks that could arise from the extended period of very low interest rates. Currently, in my assessment, financial stability vulnerabilities are at a moderate level. Mester, Loretta J.

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