Janet Yellen got investors’ attention recently. Speaking at a conference in Boston, the Federal Reserve Chair described the potential benefits of temporarily running a high-pressure economy, what one pundit labeled “running hot”. She clearly outlined “plausible ways” that a hot U.S. economy could reverse some of the adverse effects of the Great Recession with robust demand and a tight labor market. Perhaps Yellen was just speaking hypothetically. In fairness, the idea was indeed framed that way in her speech. On the other hand, maybe she was laying the groundwork for continuing on a very gradual path toward interest rate normalization, even in the face of what are likely to be surging inflation numbers over the next six months.

Reverting back to the good old days of “Fedspeak” — the use of language by central bankers that is incomprehensible to the average Joe — Yellen spoke about hysteresis, heterogeneity, and representative-agent models. But her bottom line was that some of the long-term damage done by the financial crisis could be undone by pursuing an economic environment that in the old days would be described as overheating . . .

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