Gregory Mankiw observes that the new normal is not normal. Moving in uncharted territory makes for interesting times. Hang on, kids...........
How these conflicting signals are resolved will eventually determine the course of monetary policy. Because Ms. Yellen says the economy has a lot of slack, she isn’t especially worried about inflation and isn’t eager for the Fed to quit its stimulative policies. Many measures confirm her judgment, but this recession has been extraordinary, making historical norms hard to apply, and other statistics point to a different conclusion. Ms. Yellen may well turn out to be right, but as new data arrive, she had also better be prepared to change her mind.
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