Monetary easing at full employment: how effective?
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Fed Chairman Powell, in his address to Congress this week, has confirmed that easing is coming
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In June, ECB President Draghi provided similar hints
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This comes on the back of growing concerns regarding global growth and ultimately facing too low a level of inflation
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Risks may be mounting, but, on the other hand, the unemployment rate is close to the natural rate
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There are reasons to assume that monetary easing under full employment would be less effective than when the economy is marred in recession. Monetary easing could also raise concerns about financial stability, which, if unaddressed, could weigh on the ability of monetary policy to successfully boost inflation.
Speaking in Sintra last month, Mario Draghi has hinted at an easing of monetary policy: inflation is too low compared to target, which is an issue, all the more so considering that risks to growth are tilted to the downside. Jerome Powell, in his testimony to Congress this week, has done the same: uncertainties about trade tensions and concerns about global economic prospects weigh on the outlook for the US and could lead—on a more enduring basis—to weaker than expected inflation. Yet, the prevailing level of activity compared to potential remains high: in the US, the unemployment gap (the difference between the unemployment and NAIRU, the non-accelerating inflation rate of unemployment) is negative and in the eurozone unemployment is in line with NAIRU. This complicates one's assessment of the likely ramifications associated with a new cycle of monetary easing.
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