It is quite reasonable that we will get close to the 2 per cent target on the current path that we are on. The economy is improving but at a relatively slow rate. The inflation rate has been improving but at a very slow rate as well. So I think we are on the right path. It is not obvious to me right now that we are necessarily going to overshoot.
But one of the things that I highlighted in that New Hampshire talk is that [there are] both benefits and costs for waiting. The benefits tend to be accruing to the labour market and hopefully getting labour force participation to improve...
But there are also some potential costs. We talked about one, which is financial stability. A second one is that in the past we have tended to overshoot the natural rate of employment and when we overshoot significantly on the natural rate of unemployment it takes a while for the inflationary pressures to pick up but we are not so good at slowing down the economy and getting right at the NAIRU.
So if you look at the unemployment rate curve you tend to blow through the natural rate and when you start tightening you tend to get a recession shading. So it tends to be much more abrupt than we were hoping. Which means we are not like a thermostat where you can easily calibrate the difference between 70 degrees and 68 degrees . . . When we start tightening we tend to get more of a reaction in the economy than we are hoping for.
So it makes me a little tentative to hope we would overshoot significantly, because I am not so sure we are good at fine-tuning the economy. History would say we haven’t. Ideally what you would see is long periods where we are around the estimates of full employment. That is not actually what you see.