“We had a rich, deep, serious, intellectual debate about the risks and the forecasts for the economy, and we struggled mightily with trying to understand one another’s points of view,” she said.

She played down concerns that the Fed’s easy monetary stance was fueling bubbles in the financial markets and the economy. “In general, I would not say that asset valuations are out of line with historical norms,” she said.

Michael Gapen, chief U.S. economist at Barclays Plc in New York, said Yellen may be too complacent. “Historically the Fed has had problems seeing financial instability in real time,” he said.

Weak Productivity

Yellen also argued that monetary policy was not exceptionally easy, in spite of the low level of interest rates. That’s partly because slow productivity growth and an aging workforce have reduced the economy’s potential growth rate and thus its long-run equilibrium interest rate.

“Monetary policy is only modestly accommodative,” she said.

Policy makers on Wednesday lowered their estimate of the economy’s long run cruising speed to 1.8 percent from 2 percent. They also trimmed their calculation of the long-run federal funds rate to 2.9 percent from 3 percent in June.

Former Fed official Jonathan Wright backed Yellen’s decision to give the economy more leash.

“There is little risk and considerable potential benefit from running the labor market somewhat hot for a while” because it could draw more discouraged workers off the sidelines, said Wright, who is now an economics professor at Johns Hopkins University in Baltimore.

Drew Matus, deputy U.S. chief economist at UBS Securities LLC in New York and himself a former Fed official, disagreed. Yellen “might find that room to run disappears pretty quickly,” he said.

David Fuller's view

The opening sentence above is a memorable classic, but unlikely to inspire confidence much beyond today’s relief / panic rally, fuelled a combination of renewed purchases by momentum traders and short covering by bearish speculators.   

I think she may be criticised for her view that asset valuations are not “out of line with historical norms.”  However, there is surely a risk that the Fed will not see much further improvement to make a rate hike in December an obvious choice. 

Regarding employment, the method of calculation flatters the current data.  I believe the number of people employed is still lower than it was ten years ago.  Also, there are plenty of less than fulltime workers – see also Joseph Stiglitz interview: Unemployment in the U.S. More Like 9-12%, which I first posted on Monday.