Fed Chief Sees Not Enough Data to Raise Rates
New York Times - August 22, 2014, by Binyamin Appelbaum - Janet L. Yellen, the Federal...
New York Times - August 22, 2014, by Binyamin Appelbaum - Janet L. Yellen, the Federal Reserve chairwoman, said Friday that the economy was improving but that the Fed was awaiting more evidence about the health of labor markets before deciding when to start raising interest rates.
Ms. Yellen’s first keynote speech at the annual conference here in the shadow of the Grand Tetons was mostly an extended explanation of the reasons for the Fed’s caution, and an effort to buy time for the Fed to deliberate. She emphasized her view that no single factor, including inflation, could be used to judge the recovery.
“While these assessments have always been imprecise and subject to revision, the task has become especially challenging in the aftermath of the Great Recession,” she said, both because of the recession’s “nearly unprecedented” depth and because of simultaneous changes in the economy, including the aging of the work force.
Ms. Yellen reiterated the Fed’s basic guidance after its July meeting that its policy of holding short-term interest rates near zero remained necessary and useful to reduce the share of Americans who cannot find full-time work. She said that the gap between current conditions and a return to full health remained “significant.”
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Janet L. Yellen, the Fed chairwoman, arriving at the annual conference at Jackson Hole, Wyo. Credit David Stubbs/Reuters
Acknowledging the uncertainty surrounding this assessment, Ms. Yellen added that the Fed was prepared to adjust as the economic evidence became clearer, either moving more quickly to raise rates, or holding steady for even longer. She said the Fed still expects to end the expansion of its bond holdings in October.
Ms. Yellen’s audience Friday includes some of the most prominent internal critics of her policy, including her host, Esther George, the president of the Federal Reserve Bank of Kansas City, which sponsors the annual conference, and Charles Plosser, president of the Federal Reserve Bank of Philadelphia, who dissented at the last meeting of the Fed’s policy-making committee. Both argue that the Fed has neared the limits of its ability to improve the health of the economy, and that persisting in its efforts could loosen the central bank’s control over price inflation.
A small group of demonstrators also made the trek to the remote resort hotel in the middle of Grand Teton National Park, to urge Fed officials to continue the stimulus campaign. They formed a receiving line for policy makers in the lobby outside the conference, dressed in green T-shirts emblazoned “What Recovery?”
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Janet L. Yellen, the Fed chairwoman, speaks with Ady Barkan, a lawyer with the Center for Popular Democracy, which held a demonstration at the conference. Credit David Stubbs/Reuters
“The Federal Reserve decides how many of us will remain unemployed and whether our wages will go up or stay low,” said Reuben Eckles, the pastor of a church in Wichita, Kan. “They need to hear voices from everyday people.”
The demonstration was organized by the Center for Popular Democracy, a nonprofit group that has focused its campaigns on microeconomic issues like the minimum wage and sick days. Ady Barkan, a lawyer with the group, said it had decided there was a need to focus on the big picture, too.
Mr. Barkan said Ms. Yellen had briefly engaged with the demonstrators as she arrived at the conference Thursday. “She said, ‘We understand the issues you’re talking about and we’re doing everything we can,'” he said.
The demonstrators also spent two hours speaking with Ms. George on Thursday, and said she told them the Fed needed to pull back soon.
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Fed Splits Evident Amid Wait for Yellen: Jackson Hole Journal
Bloomberg News - August 22, 2014, by Jeff Kearns, Simon Kennedy and Michael McKee - Divisions within the Federal Reserve over how long to...
Bloomberg News - August 22, 2014, by Jeff Kearns, Simon Kennedy and Michael McKee - Divisions within the Federal Reserve over how long to keep easy monetary policy are already in evidence in Wyoming as investors prepare for Chair Janet Yellen’s keynote speech.
Fed Bank of St. Louis President James Bullard told Bloomberg Radio that the U.S. central bank may begin tightening monetary policy earlier than officials previously expected.
“The evidence is leading toward an earlier increase than would have been in the works earlier this year,” said Bullard. “Labor markets have improved quite a bit relative to what the committee was thinking.”
Bullard spoke after Kansas City Fed President Esther George told Bloomberg Television that broad-based employment gains suggest the U.S. economy is strong enough to withstand higher interest rates. Philadelphia Fed President Charles Plosser, who voted against the Fed’s policy statement last month, told CNBC he’s concerned about the Fed not adjusting policy appropriately.
By contrast, Atlanta Fed President Dennis Lockhart urged more patience, warning in a separate interview with Bloomberg Radio against “moving prematurely and snuffing out some progress.”
* * *
Robots don’t steal jobs, the U.S. labor market is less flexible than it was and workers haven’t suffered unprecedented periods out of work.
Photographer: Bradly Boner/Bloomberg
Fed Chair Janet Yellen arrived at the dinner to be greeted by about 10 people wearing bright green T-shirts emblazoned with “What Recovery?” and carrying placards with labor market data. Close
Those are among the conclusions of papers being presented at the symposium. Here is a review of their contents, which can be read in full on the Kansas City Fed’s website.
Robots and computers don’t steal as many jobs as some believe, and automation actually benefits many workers, Massachusetts Institute of Technology Professor David Autor said in his paper.
A key reason humans aren’t obsolete yet is that simple tasks such as visually identifying a chair, which any child can do, aren’t so easy for engineers to teach to computers, Autor said.
“Journalists and expert commentators overstate the extent of machine substitution for human labor and ignore the strong complementarities that increase productivity, raise earnings, and augment demand for skilled labor,” he wrote. “Challenges to substituting machines for workers in tasks requiring flexibility, judgment, and common sense remain immense.”
* * *
The U.S. labor market became less fluid in recent decades partly because of an aging workforce, a shift to older businesses, and the spread of occupational licensing and certification, economists Steven J. Davis and John Haltiwanger wrote in their paper.
The economists define labor market fluidity as “flows of jobs and workers across employers.” The paper found the U.S. “underwent a large, broad-based decline in the pace of labor market flows in recent decades.”
“An aging workforce is a factor behind the slowdown of worker reallocation,” the paper said.
* * *
U.S. workers in the aftermath of the 2007-2009 recession haven’t experienced unprecedentedly long bouts of non-employment, according to a paper by economists Jae Song and Till von Wachter.
Their findings “suggest that the potential for hysteresis in the aftermath of the Great Recession is moderate,” the paper said. Hysteresis posits that people out of work for too long have a harder time finding work, leading to a persistent decline in the employment-to-population rate
* * *
Policy makers would benefit from a better understanding of labor markets, economist Giuseppe Bertola argued in a paper that weighed the impact of rules making those markets rigid or flexible.
Rules that protect workers from job losses and provide more generous unemployment benefits can soften and smooth shocks to the economy, said Bertola.
* * *
George opened the symposium late yesterday by putting the presenters on the spot.
The last conference devoted to labor markets was 20 years ago, George told the group of almost 200 as they ate steak and salmon dinners beneath elk antler chandeliers.
The presenters and discussants back then included five future Nobel Prize winners and two academics who would go on to be central bankers: Bank of England Deputy Governor Charles Bean and Stanley Fischer, the Bank of Israel governor who became Fed vice chairman in June. Fischer sat at one of the front tables last night.
“So for those of you that will be on the program,” George said to laughter, “We’re either setting you up for a blessing or a curse.”
This year’s topic is “Re-Inventing Labor Market Dynamics.” In 1994 it was “Reducing Unemployment: Current Issues and Policy Options.”
George said she went through the 1994 proceedings only to find central bankers and economists are still grappling with some of the same basic issues today.
“I saw that the discussion included things like the decline in demand for low-skilled workers due to technology and the challenge of the long-term unemployment,” George said. “And questions were raised by that symposium, as they are today, about the usefulness of the unemployment rate as a measure of economic slack.”
It reads like a list of the most vexing issues the Fed faces now and will be attempting to tackle today and tomorrow.
* * *
Fed Chair Janet Yellen arrived at the dinner to be greeted by about 10 people wearing bright green T-shirts emblazoned with “What Recovery?” and carrying placards with labor market data.
The protesters had traveled to Wyoming to highlight the plight of “struggling workers from around the country” who want the Fed to pursue “full employment that reduces poverty and expands the middle class,” according to the Center for Popular Democracy, a Brooklyn-based organization. The backs of their T-shirts had a graph comparing the performance of wage growth among the top 1 percent and the rest.
Ady Barkan, a staff attorney with the group, spoke briefly with Yellen at the door of the lodge’s Explorers Room. “She said she understands the issues we’re talking about and is doing everything they can,” he said, after she had entered the room.
Yellen has regularly cited weak labor markets as a scourge of the economy she’s trying to boost with easy monetary policy.
Shemethia Butler, who works part time at a McDonald’s Corp. restaurant in Washington, was one of those to make the trip. The 34-year-old said that while she isn’t up on monetary policy, she wants policy makers to know she fears higher interest rates for her and her community. She said she works 25 to 35 hours a week for $9.50 an hour at a job she’s had for just over a year. Before that she was unemployed for two years.
“There’s no recovery,” Butler said. “The economy is broken because there aren’t enough jobs for people like me.”
* * *
Yellen’s speech will be the main event of the first full day of the conference. She will speak at 8 a.m. Mountain Time today.
Her address will be followed by the presentation of the paper by Davis and Haltiwanger.
Autor will then discuss job polarization before a panel on demographics featuring Karen Eggleston of Stanford University, David Lam of the University of Michigan and Ronald Lee of the University of California, Berkeley.
European Central Bank President Mario Draghi will deliver the keynote luncheon speech.
Tomorrow, Von Wachter and then Bertola will present their papers.
The final panel will provide an overview of labor markets and monetary policy. It will include Bank of England Deputy Governor Ben Broadbent, Bank of Japan Governor Haruhiko Kuroda and Brazilian central bank chief Alexandre Tombini.
* * *
The conference is lacking Wall Street participants for the first time.
An exception is Jacob Frenkel, chairman of JPMorgan Chase International, who is attending in his capacity of chairman of the board of trustees of the Group of 30, a private-sector group of mainly former policy makers which advises central banks and governments. Tim Adams, president of the Institute of International Finance, is also present.
Draghi, Kuroda and Bank of Canada Governor Stephen Poloz provide international central banking firepower.
Among academics in attendance are Alan Blinder of Princeton University, Harvard University’s Kenneth Rogoff and Martin Feldstein, and John Taylor of Stanford University. President Barack Obama’s administration is represented by Jason Furman, chairman of the Council of Economic Advisers and Jeffrey Zients, director of the National Economic Council.
* * *
The backdrop for the symposium and Yellen’s speech was set by the release of the minutes from the Federal Open Market Committee’s July discussions.
Fed officials in July raised the possibility they might raise rates sooner than anticipated, as they neared agreement on an exit strategy. Some participants were “increasingly uncomfortable” with the pledge to keep interest rates low for a “considerable period,” the minutes said.
At the same time, “many participants” still saw “a larger gap between current labor market conditions and those consistent with their assessments of normal levels of labor utilization.”
* * *
* * *
Some recent stories on the U.S. labor market:
* * *
The opening day of Jackson Hole has been associated with stock-market gains in each of the past seven years. The Standard & Poor’s 500 Index rose an average 1.3 percent on each of them from 2007 to 2012, following speeches by then-Chairman Ben S. Bernanke, who skipped last year’s conference.
The biggest climb was the 1.9 percent of 2009, when Bernanke said the economy appeared to be “leveling out.” Gains also followed his signals of 2010 and 2012 that fresh asset-purchases were imminent.
The bar is therefore set high for Yellen who identifies slack labor markets as a reason for easy monetary policy. Economist Ed Yardeni says the “Fairy Godmother of the Bull Market” won’t let us down.
Still, Steven Englander of Citigroup Inc. says that because “dovishness is increasingly anticipated,” Yellen may have to intensify her support for low interest rates if risk-assets such as stocks are to rally anew.
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Jackson Hole Demonstrators Rally Against Rate Hike
Associated Press - August 22, 2014, by Matthew Brown — Shadowing central bankers and economists at the annual Federal Reserve conference here, a group of about 10 demonstrators pressed Fed Chair...
Associated Press - August 22, 2014, by Matthew Brown — Shadowing central bankers and economists at the annual Federal Reserve conference here, a group of about 10 demonstrators pressed Fed Chair Janet Yellen not to yield to pressure to raise interest rates.
Carrying placards and green T-shirts embossed with the slogan "What recovery?" they said they'd come from New York, Missouri, Minnesota and elsewhere to draw attention to people left behind by the recovery and still unable to find work.
One demonstrator approached Yellen to press his point as she prepared to enter the opening reception Thursday night. With security guards hovering nearby, the two shook hands and spoke for about a minute before Yellen entered the closed-door gathering.
Yellen spokesman Doug Tillett said her staff would seek to arrange a meeting between the chair and the demonstrators back in Washington.
Their message was generally in sync with Yellen's stance since she became Fed chair in February to keep rates low to help support a still-subpar economy. In a speech to the conference Friday, Yellen noted that while the unemployment rate has steadily dropped, other gauges of the U.S. job market have been harder to evaluate and may reflect continued weakness.
The timing of a Fed rate increase remains unclear, though many economists foresee an increase by mid-2015.
The demonstrators, including several who said they were unemployed or had settled for low-wage jobs, said they'd traveled here to encourage Yellen not to give in to those who say rates must be increased to avoid causing high inflation or other financial instability.
The demonstrator who approached Yellen before the opening reception was Ady Barkan of a group called the Center for Popular Democracy in New York.
"She said she understood what we were saying and that they were doing everything they can," Barkan said Friday. "We'd like them to do more."
He argued that the Fed should lower its target for unemployment and factor in whether wages are rising consistently before making any move to raise rates.
Tillett, the Yellen spokesman, said, "We're certainly willing to meet with them and hear what they have to say."
Asked whether there were security concerns in having demonstrators approach Yellen and seek to buttonhole other conference attendees, Tillett said, "We appreciate their freedom of expression."
The demonstrators also met before the event with Esther George, president of the Federal Reserve Bank of Kansas City, which sponsors the Jackson Hole event. Later, they managed to corner Fed Vice Chair Stanley Fischer during a break in the proceedings.
"We're not in recovery," Cee Cee Butler, a 34-year-old mother of two from Washington, D.C., told Fischer. "It may be fine on Wall Street, but on my streets, it's not fine at all...There's a lot of homeless people that live in my city, a lot of children that panhandle quarters."
Butler said she works a minimum wage job at McDonald's and receives food stamps but still can't make ends meet. She said the trip to Wyoming — her first time aboard an airplane, she said — was paid for by donations from advocacy groups.
Another demonstrator, 42-year-old Kendra Brooks, told Fischer that she holds a master's degree in business administration but has seen her income drop by more than half since losing her job as a program director at a nonprofit about a year and a half ago.
Two weeks ago, Brooks said, she began working for Action United in Philadelphia, a community advocacy group. But it's not comparable to her former job, she said, and "is like starting from scratch."
"They heard what we said, but the outcome of that, in terms of interest rates, is still pending," Brooks said of the group's interactions with Yellen, George and Fischer. "This has been what my recovery looks like, and it's a nightmare."
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Meet the Activists Who Want to Make the Fed Listen to Workers for a Change
Vox - August 22, 2014, by Dylan Matthews - The Jackson Hole conference, an annual retreat in Wyoming...
Vox - August 22, 2014, by Dylan Matthews - The Jackson Hole conference, an annual retreat in Wyoming organized by the Kansas City Fed, is usually frequented by central bankers, private sector economists, and academics. It's not usually frequented by everyday workers.
This year was differrent. A group of community activists traveled to the conference to urge policymakers to not do what an increasing number of voices in the Fed system and in the financial sector have been urging them to do: raise interest rates.
"They need to stimulate the economy," says Kendra Brooks, a former bank manager from Philadelphia who's been unemployed for about a year. "Increasing the interest rate here isn't going to help the people without jobs. It's going to put us further into debt."
"I want to at least get our voices heard before they make their decisions,"Tyrone Raino, who recently took a job requiring a 40 mile commute from his home in Minneapolis, says.
Brooks and Raino are both members of local community organizing groups — Minnesota Neighborhoods Organizing for Change and Action United in Philadelphia, respectively — which have, with the Center for Popular Democracy, come together to try to do something that hasn't really been done before: grassroots lobbying of the Fed. And they're being heard.
According to the Center's senior attorney, Ady Barkan, the group met with Kansas Fed chief Esther George for two hours, and spoke to Fed chair Janet Yellen, Chicago Fed chief Charles Evans, and Minneapolis Fed chief Narayana Kocherlakota. The last three are sympathetic to Brooks and Raino's perspective — Raino called Kocherlakota "one of the voices in the Federal Reserve system who understands the economy is far from recovery for most of us" in an article for MinnPost — George has expressed support for raising interest rates. For people trying to lobby a generally unlobbied institution, that's an impressive start.
To some extent, the Fed is designed to be impervious to outside pressure like this. Many economists believe that central bank independence — that is, having a central bank that is not directly controlled by legislatures or other democratically elected officials — is crucial to effective monetary policy. In 1993, future Treasury Secretary Larry Summers and his Harvard colleague Alberto Alesina authored a hugely influential paper arguing that countries with more independent banks have less variable prices and lower inflation overall. While that finding was controversial, the view that month-to-month policy decisions by the Fed should not be influenced by politicians — what Fed vice chair Stanley Fischer has called"instrument independence" — is widely accepted.
But Barkan argues that the independence the Fed currently enjoys is one-sided. "There are 108 board members across the 12 regional banks," he notes. "Under the law, 72 of them are supposed to represent the public interest and 36 are supposed to represent banking and financial interests. But of the 108, 97 are from financial institutions or corporations. Only 9 are from nonprofits, and even those are from major, wealthy nonprofits. Only 2 of the 108 board members represent labor organizations and workers."
"This desire for Fed independence really only goes in one direction," he concludes. "It's a desire for insulation from the needs of regular people."
Barkan, Brooks, and Raino avoid endorsing specific proposals for the Fed to get tougher on unemployment, like setting a nominal GDP target or abolishing paper money or allowing "helicopter drops." The emphasis is more on convincing the Fed that there is still a problem — that the labor market still has slack.
While some in the Fed worry that people are getting too many raises, Barkan argues that wage growth is still too slow — and that the labor market won't be healthy until it's significantly higher. "Real rising wages will represent tightening of the labor markets, and that's what you want to pull the long-term unemployed back into the market, and vulnerable workers back into the market," he says. "It's only once the labor market tightens that you can help vulnerable communities get out of this long recession."
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Yellen Says Improving Economy Still Faces Challenges
The Washington Post - August 22, 2014, by Ylan Q. Mui - Federal Reserve Chair Janet L. Yellen on Friday expressed growing confidence that America’s market is...
The Washington Post - August 22, 2014, by Ylan Q. Mui - Federal Reserve Chair Janet L. Yellen on Friday expressed growing confidence that America’s market is improving but uncertainty over how much further it has to go.
Yellen began her remarks before a select group of elite economists and central bankers here by enumerating the unequivocal progress made since the Great Recession ended: Job growth has averaged 230,000 a month this year, and the unemployment rate has fallen to 6.2 percent after peaking in the double digits during the depths of the crisis.
But she quickly transitioned to the challenges in determining how close the labor market is to being fully healed — and how much the nation’s central bank should do to speed its convalescence. Although Yellen has consistently emphasized that the recovery is incomplete, her speech Friday focused on the difficulty of making a current diagnosis.
“Our understanding of labor market developments and their potential implications for inflation will remain far from perfect,” Yellen said at the annual conference sponsored by the Federal Reserve Bank of Kansas City. “As a consequence, monetary policy must be conducted in a pragmatic manner.”
The Fed slashed its target for short-term interest rates to zero and pumped trillions of dollars into the economy in the aftermath of the recession. More than five years later, it is finally scaling back that support. The Fed is slated to end its bond-buying program in October and is debating when to raise interest rates.
That decision carries enormous consequences: Move too soon, and the Fed risks undermining the economic progress made so far. Move too late, and it could risk stoking inflation in the future and sowing the seeds of the next financial crisis.
Investors generally expect the Fed to raise rates in the middle of next year, but several central bank officials gathered here cautioned that the moment could come earlier if the recovery improves more rapidly than expected. Yellen gave no clear timeline Friday but called for a “more nuanced” reading of the labor market as the economy returns to normal.
For example, the size of the nation’s workforce unexpectedly declined after the recession, the result of both demographic factors and unemployed workers who gave up hope of finding a job. Yellen reiterated Friday that a stronger economy could help stem that drop and suggested it may already be working. She also said that the run-up in involuntary part-time work and the low level of people choosing to quit their jobs could be reversed as the labor market improves.
But Yellen seemed to shift her stance on the country’s stagnant wage growth. Previously, she has cited it as a sign that the labor market remains weak. But on Friday she called on research that suggests wage growth has been subdued because employers were unable to cut salaries deeply enough during the recession, a phenomenon dubbed “pent-up wage deflation.” She also suggested that globalization and the difficulty that the long-term unemployed face in finding jobs could also be depressing wage growth.
The uncertainty facing the Fed means it will be carefully evaluating economic data over the coming months, Yellen said. And she said the central bank will remain nimble in its response.
“There is no simple recipe for appropriate policy in this context, and the [Fed] is particularly attentive to the need to clearly describe the policy framework we are using to meet these challenges,” she said.
Central bankers were not the only ones gathered in the Grand Tetons this year. Several workers and activists also traveled to Jackson Hole and called on the central bank to be cautious in removing its support for the economy, the first protest at the conference in recent memory.
The grass-roots group, organized by the Center for Popular Democracy, also issued an open letter to the Fed earlier in the week signed by more than 60 activist organizations. Kansas City Fed President Esther L. George — one of the most vocal proponents of raising interest rates soon — met with the protesters in Jackson Hole on Thursday for about two hours to hear their stories. Ady Barkan, senior attorney at the Center for Popular Democracy, said the groups plan to request meetings with other Fed officials as well.
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Yellen Says Debate Over When to Hike Now Center Stage
MarketWatch - August 22, 2014, by Greg Robb - With the economy mending, the Federal Reserve’s emphasis is “naturally shifting” to the debate over when to raise interest rates, the head of the U.S...
MarketWatch - August 22, 2014, by Greg Robb - With the economy mending, the Federal Reserve’s emphasis is “naturally shifting” to the debate over when to raise interest rates, the head of the U.S. central bank said Friday.
“With the economy getting closer to our objectives, the FOMC’s emphasis is naturally shifting to questions about the degree of remaining slack, how quickly that slack is to be taken up, and thereby to the question of under what conditions we should begin dialing back our extraordinary accommodation,” Fed Chairwoman Janet Yellen said in a speech opening the central bank’s summer policy conference in Jackson Hole.
Yellen said there was “no simple recipe” for the Fed to follow, but again warned that rate hikes could come sooner than expected if progress in the labor market continued to be more rapid than anticipated or if inflation moves up more rapidly.
Balancing this more hawkish tone, Yellen said 19 labor market indicators followed by the Fed suggest the decline in the unemployment rate overstates the improvement in overall labor-market conditions.
The initial reaction in the stock market was a muted one, with the Dow Jones Industrial Average DJIA, -0.18% trading in a narrow range. Read Market Snapshot
Her comments “skirted around the issue of future monetary policy by noting that whilst there were a number of factors that might mean the labor market was less of a threat to inflation than in previous business cycles, equally, there were factors that might make it more so,” said ING economist Rob Carnell in a note to clients.
Yellen’s remarks about a shift in the Fed debate toward when, and under what conditions to tighten, lend credence to comments earlier this month from Richard Fisher, the hawkish president of the Dallas Fed, who said that the discussion among policy makers at their last meeting had moved in his direction.
Minutes of that meeting released on Wednesday were also judged by Fed watchers to be hawkish.
Perhaps sensing the shift, protestors have arrived for the first time in Jackson Hole this year urging the Fed to delay any rate hike.
Yellen gave no sense a rate hike was imminent. She noted the Fed still thinks that labor-market slack is “significant” and that the central bank has repeated it intends to hold rates close to zero for a “considerable time” after the Fed ends its bond-buying program, expected in October.
But her remarks suggest the first rate hike since 2006 is now on the table for active discussion.
Yellen and her allies on the Fed have signaled the first rate hike won’t happen until after the middle of next year. Hawks on the committee are pressing for an earlier move, and they have been vocal in speaking to reporters at Jackson Hole.
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YELLEN: We're Not There Yet
Business Insider - August 22, 2014, by Myles Udland - Federal Reserve Chair Janet Yellen is speaking at the...
Business Insider - August 22, 2014, by Myles Udland - Federal Reserve Chair Janet Yellen is speaking at the Kansas City Fed's economic symposium at Jackson Hole.
Yellen's remarks are focused on the labor market, which she said still hasn't recovered from the financial crisis.
Among Yellen's notable comments include the sluggish pace of wage growth.
First, the sluggish pace of nominal and real wage growth in recent years may reflect the phenomenon of 'pent-up wage deflation,'" Yellen said. "The evidence suggests that many firms faced significant constraints in lowering compensation during the recession and the earlier part of the recovery because of 'downward nominal wage rigidity' — namely, an inability or unwillingness on the part of firms to cut nominal wages."
Yellen added that given the labor market outlook, "There is no simple recipe for appropriate policy in this context, and the FOMC is particularly attentive to the need to clearly describe the policy framework we are using to meet these challenges."
Yellen said that despite strengthening indicators in the labor market, she still sees "significant" underutilization of labor resources.
Here's the full text of Yellen's remarks:
In the five years since the end of the Great Recession, the economy has made considerable progress in recovering from the largest and most sustained loss of employment in the United States since the Great Depression.1 More jobs have now been created in the recovery than were lost in the downturn, with payroll employment in May of this year finally exceeding the previous peak in January 2008. Job gains in 2014 have averaged 230,000 a month, up from the 190,000 a month pace during the preceding two years. The unemployment rate, at 6.2 percent in July, has declined nearly 4 percentage points from its late 2009 peak. Over the past year, the unemployment rate has fallen considerably, and at a surprisingly rapid pace. These developments are encouraging, but it speaks to the depth of the damage that, five years after the end of the recession, the labor market has yet to fully recover.
The Federal Reserve's monetary policy objective is to foster maximum employment and price stability. In this regard, a key challenge is to assess just how far the economy now stands from the attainment of its maximum employment goal. Judgments concerning the size of that gap are complicated by ongoing shifts in the structure of the labor market and the possibility that the severe recession caused persistent changes in the labor market's functioning.
These and other questions about the labor market are central to the conduct of monetary policy, so I am pleased that the organizers of this year's symposium chose labor market dynamics as its theme. My colleagues on the Federal Open Market Committee (FOMC) and I look to the presentations and discussions over the next two days for insights into possible changes that are affecting the labor market. I expect, however, that our understanding of labor market developments and their potential implications for inflation will remain far from perfect. As a consequence, monetary policy ultimately must be conducted in a pragmatic manner that relies not on any particular indicator or model, but instead reflects an ongoing assessment of a wide range of information in the context of our ever-evolving understanding of the economy.
The Labor Market Recovery and Monetary Policy
In my remarks this morning, I will review a number of developments related to the functioning of the labor market that have made it more difficult to judge the remaining degree of slack. Differing interpretations of these developments affect judgments concerning the appropriate path of monetary policy. Before turning to the specifics, however, I would like to provide some context concerning the role of the labor market in shaping monetary policy over the past several years. During that time, the FOMC has maintained a highly accommodative monetary policy in pursuit of its congressionally mandated goals of maximum employment and stable prices. The Committee judged such a stance appropriate because inflation has fallen short of our 2 percent objective while the labor market, until recently, operated very far from any reasonable definition of maximum employment.
The FOMC's current program of asset purchases began when the unemployment rate stood at 8.1 percent and progress in lowering it was expected to be much slower than desired. The Committee's objective was to achieve a substantial improvement in the outlook for the labor market, and as progress toward this goal has materialized, we have reduced our pace of asset purchases and expect to complete this program in October. In addition, in December 2012, the Committee modified its forward guidance for the federal funds rate, stating that "as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored," the Committee would not even consider raising the federal funds rate above the 0 to 1/4 percent range.2 This "threshold based" forward guidance was deemed appropriate under conditions in which inflation was subdued and the economy remained unambiguously far from maximum employment.
Earlier this year, however, with the unemployment rate declining faster than had been anticipated and nearing the 6-1/2 percent threshold, the FOMC recast its forward guidance, stating that "in determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee would assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation."3 As the recovery progresses, assessments of the degree of remaining slack in the labor market need to become more nuanced because of considerable uncertainty about the level of employment consistent with the Federal Reserve's dual mandate. Indeed, in its 2012 statement on longer-run goals and monetary policy strategy, the FOMC explicitly recognized that factors determining maximum employment "may change over time and may not be directly measurable," and that assessments of the level of maximum employment "are necessarily uncertain and subject to revision."4 Accordingly, the reformulated forward guidance reaffirms the FOMC's view that policy decisions will not be based on any single indicator, but will instead take into account a wide range of information on the labor market, as well as inflation and financial developments.5
Interpreting Labor Market Surprises: Past and Future
The assessment of labor market slack is rarely simple and has been especially challenging recently. Estimates of slack necessitate difficult judgments about the magnitudes of the cyclical and structural influences affecting labor market variables, including labor force participation, the extent of part-time employment for economic reasons, and labor market flows, such as the pace of hires and quits. A considerable body of research suggests that the behavior of these and other labor market variables has changed since the Great Recession.6 Along with cyclical influences, significant structural factors have affected the labor market, including the aging of the workforce and other demographic trends, possible changes in the underlying degree of dynamism in the labor market, and the phenomenon of "polarization"--that is, the reduction in the relative number of middle-skill jobs.7
Consider first the behavior of the labor force participation rate, which has declined substantially since the end of the recession even as the unemployment rate has fallen. As a consequence, the employment-to-population ratio has increased far less over the past several years than the unemployment rate alone would indicate, based on past experience. For policymakers, the key question is: What portion of the decline in labor force participation reflects structural shifts and what portion reflects cyclical weakness in the labor market? If the cyclical component is abnormally large, relative to the unemployment rate, then it might be seen as an additional contributor to labor market slack.
Labor force participation peaked in early 2000, so its decline began well before the Great Recession. A portion of that decline clearly relates to the aging of the baby boom generation. But the pace of decline accelerated with the recession. As an accounting matter, the drop in the participation rate since 2008 can be attributed to increases in four factors: retirement, disability, school enrollment, and other reasons, including worker discouragement.8 Of these, greater worker discouragement is most directly the result of a weak labor market, so we could reasonably expect further increases in labor demand to pull a sizable share of discouraged workers back into the workforce. Indeed, the flattening out of the labor force participation rate since late last year could partly reflect discouraged workers rejoining the labor force in response to the significant improvements that we have seen in labor market conditions. If so, the cyclical shortfall in labor force participation may have diminished.
What is more difficult to determine is whether some portion of the increase in disability rates, retirements, and school enrollments since the Great Recession reflects cyclical forces. While structural factors have clearly and importantly affected each of these three trends, some portion of the decline in labor force participation resulting from these trends could be related to the recession and slow recovery and therefore might reverse in a stronger labor market.9 Disability applications and educational enrollments typically are affected by cyclical factors, and existing evidence suggests that the elevated levels of both may partly reflect perceptions of poor job prospects.10 Moreover, the rapid pace of retirements over the past few years might reflect some degree of pull-forward of future retirements in the face of a weak labor market. If so, retirements might contribute less to declining participation in the period ahead than would otherwise be expected based on the aging workforce.11
A second factor bearing on estimates of labor market slack is the elevated number of workers who are employed part time but desire full-time work (those classified as "part time for economic reasons"). At nearly 5 percent of the labor force, the number of such workers is notably larger, relative to the unemployment rate, than has been typical historically, providing another reason why the current level of the unemployment rate may understate the amount of remaining slack in the labor market. Again, however, some portion of the rise in involuntary part-time work may reflect structural rather than cyclical factors. For example, the ongoing shift in employment away from goods production and toward services, a sector which historically has used a greater portion of part-time workers, may be boosting the share of part-time jobs. Likewise, the continuing decline of middle-skill jobs, some of which could be replaced by part-time jobs, may raise the share of part-time jobs in overall employment.12 Despite these challenges in assessing where the share of those employed part time for economic reasons may settle in the long run, the sharp run-up in involuntary part-time employment during the recession and its slow decline thereafter suggest that cyclical factors are significant.
Private sector labor market flows provide additional indications of the strength of the labor market. For example, the quits rate has tended to be pro-cyclical, since more workers voluntarily quit their jobs when they are more confident about their ability to find new ones and when firms are competing more actively for new hires. Indeed, the quits rate has picked up with improvements in the labor market over the past year, but it still remains somewhat depressed relative to its level before the recession. A significant increase in job openings over the past year suggests notable improvement in labor market conditions, but the hiring rate has only partially recovered from its decline during the recession. Given the rise in job vacancies, hiring may be poised to pick up, but the failure of hiring to rise with vacancies could also indicate that firms perceive the prospects for economic growth as still insufficient to justify adding to payrolls. Alternatively, subdued hiring could indicate that firms are encountering difficulties in finding qualified job applicants. As is true of the other indicators I have discussed, labor market flows tend to reflect not only cyclical but also structural changes in the economy. Indeed, these flows may provide evidence of reduced labor market dynamism, which could prove quite persistent.13 That said, the balance of evidence leads me to conclude that weak aggregate demand has contributed significantly to the depressed levels of quits and hires during the recession and in the recovery.
One convenient way to summarize the information contained in a large number of indicators is through the use of so-called factor models. Following this methodology, Federal Reserve Board staff developed a labor market conditions index from 19 labor market indicators, including four I just discussed.14 This broadly based metric supports the conclusion that the labor market has improved significantly over the past year, but it also suggests that the decline in the unemployment rate over this period somewhat overstates the improvement in overall labor market conditions.
Finally, changes in labor compensation may also help shed light on the degree of labor market slack, although here, too, there are significant challenges in distinguishing between cyclical and structural influences. Over the past several years, wage inflation, as measured by several different indexes, has averaged about 2 percent, and there has been little evidence of any broad-based acceleration in either wages or compensation. Indeed, in real terms, wages have been about flat, growing less than labor productivity. This pattern of subdued real wage gains suggests that nominal compensation could rise more quickly without exerting any meaningful upward pressure on inflation. And, since wage movements have historically been sensitive to tightness in the labor market, the recent behavior of both nominal and real wages point to weaker labor market conditions than would be indicated by the current unemployment rate.
There are three reasons, however, why we should be cautious in drawing such a conclusion. First, the sluggish pace of nominal and real wage growth in recent years may reflect the phenomenon of "pent-up wage deflation."15 The evidence suggests that many firms faced significant constraints in lowering compensation during the recession and the earlier part of the recovery because of "downward nominal wage rigidity"--namely, an inability or unwillingness on the part of firms to cut nominal wages. To the extent that firms faced limits in reducing real and nominal wages when the labor market was exceptionally weak, they may find that now they do not need to raise wages to attract qualified workers. As a result, wages might rise relatively slowly as the labor market strengthens. If pent-up wage deflation is holding down wage growth, the current very moderate wage growth could be a misleading signal of the degree of remaining slack. Further, wages could begin to rise at a noticeably more rapid pace once pent-up wage deflation has been absorbed.
Second, wage developments reflect not only cyclical but also secular trends that have likely affected the evolution of labor's share of income in recent years. As I noted, real wages have been rising less rapidly than productivity, implying that real unit labor costs have been declining, a pattern suggesting that there is scope for nominal wages to accelerate from their recent pace without creating meaningful inflationary pressure. However, research suggests that the decline in real unit labor costs may partly reflect secular factors that predate the recession, including changing patterns of production and international trade, as well as measurement issues.16 If so, productivity growth could continue to outpace real wage gains even when the economy is again operating at its potential.
A third issue that complicates the interpretation of wage trends is the possibility that, because of the dislocations of the Great Recession, transitory wage and price pressures could emerge well before maximum sustainable employment has been reached, although they would abate over time as the economy moves back toward maximum employment.17 The argument is that workers who have suffered long-term unemployment--along with, perhaps, those who have dropped out of the labor force but would return to work in a stronger economy--face significant impediments to reemployment. In this case, further improvement in the labor market could entail stronger wage pressures for a time before maximum employment has been attained.18
Implications of Labor Market Developments for Monetary Policy
The focus of my remarks to this point has been on the functioning of the labor market and how cyclical and structural influences have complicated the task of determining the state of the economy relative to the FOMC's objective of maximum employment. In my remaining time, I will turn to the special challenges that these difficulties in assessing the labor market pose for evaluating the appropriate stance of monetary policy.
Any discussion of appropriate monetary policy must be framed by the Federal Reserve's dual mandate to promote maximum employment and price stability. For much of the past five years, the FOMC has been confronted with an obvious and substantial degree of slack in the labor market and significant risks of slipping into persistent below-target inflation. In such circumstances, the need for extraordinary accommodation is unambiguous, in my view.
However, with the economy getting closer to our objectives, the FOMC's emphasis is naturally shifting to questions about the degree of remaining slack, how quickly that slack is likely to be taken up, and thereby to the question of under what conditions we should begin dialing back our extraordinary accommodation. As should be evident from my remarks so far, I believe that our assessments of the degree of slack must be based on a wide range of variables and will require difficult judgments about the cyclical and structural influences in the labor market. While these assessments have always been imprecise and subject to revision, the task has become especially challenging in the aftermath of the Great Recession, which brought nearly unprecedented cyclical dislocations and may have been associated with similarly unprecedented structural changes in the labor market--changes that have yet to be fully understood.
So, what is a monetary policymaker to do? Some have argued that, in light of the uncertainties associated with estimating labor market slack, policymakers should focus mainly on inflation developments in determining appropriate policy. To take an extreme case, if labor market slack was the dominant and predictable driver of inflation, we could largely ignore labor market indicators and look instead at the behavior of inflation to determine the extent of slack in the labor market. In present circumstances, with inflation still running below the FOMC's 2 percent objective, such an approach would suggest that we could maintain policy accommodation until inflation is clearly moving back toward 2 percent, at which point we could also be confident that slack had diminished.
Of course, our task is not nearly so straightforward. Historically, slack has accounted for only a small portion of the fluctuations in inflation. Indeed, unusual aspects of the current recovery may have shifted the lead-lag relationship between a tightening labor market and rising inflation pressures in either direction. For example, as I discussed earlier, if downward nominal wage rigidities created a stock of pent-up wage deflation during the economic downturn, observed wage and price pressures associated with a given amount of slack or pace of reduction in slack might be unusually low for a time. If so, the first clear signs of inflation pressure could come later than usual in the progression toward maximum employment. As a result, maintaining a high degree of monetary policy accommodation until inflation pressures emerge could, in this case, unduly delay the removal of accommodation, necessitating an abrupt and potentially disruptive tightening of policy later on.
Conversely, profound dislocations in the labor market in recent years--such as depressed participation associated with worker discouragement and a still-substantial level of long-term unemployment--may cause inflation pressures to arise earlier than usual as the degree of slack in the labor market declines. However, some of the resulting wage and price pressures could subsequently ease as higher real wages draw workers back into the labor force and lower long-term unemployment.19 As a consequence, tightening monetary policy as soon as inflation moves back toward 2 percent might, in this case, prevent labor markets from recovering fully and so would not be consistent with the dual mandate.
Inferring the degree of resource utilization from real-time readings on inflation is further complicated by the familiar challenge of distinguishing transitory price changes from persistent price pressures. Indeed, the recent firming of inflation toward our 2 percent goal appears to reflect a combination of both factors.
These complexities in evaluating the relationship between slack and inflation pressures in the current recovery are illustrative of a host of issues that the FOMC will be grappling with as the recovery continues. There is no simple recipe for appropriate policy in this context, and the FOMC is particularly attentive to the need to clearly describe the policy framework we are using to meet these challenges. As the FOMC has noted in its recent policy statements, the stance of policy will be guided by our assessments of how far we are from our objectives of maximum employment and 2 percent inflation as well as our assessment of the likely pace of progress toward those objectives.
At the FOMC's most recent meeting, the Committee judged, based on a range of labor market indicators, that "labor market conditions improved."20 Indeed, as I noted earlier, they have improved more rapidly than the Committee had anticipated. Nevertheless, the Committee judged that underutilization of labor resources still remains significant. Given this assessment and the Committee's expectation that inflation will gradually move up toward its longer-run objective, the Committee reaffirmed its view "that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after our current asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored."21 But if progress in the labor market continues to be more rapid than anticipated by the Committee or if inflation moves up more rapidly than anticipated, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target could come sooner than the Committee currently expects and could be more rapid thereafter. Of course, if economic performance turns out to be disappointing and progress toward our goals proceeds more slowly than we expect, then the future path of interest rates likely would be more accommodative than we currently anticipate. As I have noted many times, monetary policy is not on a preset path. The Committee will be closely monitoring incoming information on the labor market and inflation in determining the appropriate stance of monetary policy.
Overall, I suspect that many of the labor market issues you will be discussing at this conference will be at the center of FOMC discussions for some time to come. I thank you in advance for the insights you will offer and encourage you to continue the important research that advances our understanding of cyclical and structural labor market issues.
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Fed, Rates and Sun
New York Times - August 22, 2014, by Victoria Shannon - Sun and a little fun mixed with speeches are the hallmarks of the annual retreat of ...
New York Times - August 22, 2014, by Victoria Shannon - Sun and a little fun mixed with speeches are the hallmarks of the annual retreat of central bankers in Jackson Hole, Wyo.
But today was the first time participants could remember demonstrators showing up.
Protesters with green T-shirts reading “What Recovery?” were organized by the Center for Popular Democracy, a nonprofit group, to greet the bankers at their resort hotel.
“The demonstrators want to remind Fed officials, who tend to deal in abstractions, that real people are affected by their decisions,” says our Fed correspondent, Binyamin Appelbaum.
“Their presence has been mentioned repeatedly by Fed officials and speakers, suggesting that it has made an impression.”
Notably, the Fed chairwoman, Janet L. Yellen, stopped by to express sympathy. In a speech today, she said the central bank needed more evidence of growing employment before deciding when to raise interest rates.
“Historically, particularly during the 1980s, the Fed faced a lot of public pressure as it raised interest rates,” Mr. Appelbaum says, “so this may be the first sign of things to come.”
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Activists at Jackson Hole See Recovery on Wall Street, ‘Not My Street’
The Wall Street Journal - August 22, 2014, by Pedro Nicolaci Da Costa - A group of activists has descended on the Kansas City Federal Reserve Bank’s annual conference in Jackson Hole, Wyo., to...
The Wall Street Journal - August 22, 2014, by Pedro Nicolaci Da Costa - A group of activists has descended on the Kansas City Federal Reserve Bank’s annual conference in Jackson Hole, Wyo., to tell central bank officials that any move to raise interest rates soon could wreak havoc on the lives of Americans still struggling with a weak economic recovery.
U.S. unemployment has fallen fairly rapidly in recent months, to 6.2% in July, down from its post-recession peak of 10%. However, the activists said those numbers mask much deeper troubles in the country’s poorer neighborhoods. The unemployment rate for African-Americans, for instance, was 11.1% in July.
Reggie Rounds, 57 years old, came to the conference from Ferguson, Mo., the site of recent violent protests following the killing of an unarmed teenager by a police officer. During a brief conversation here with Federal Reserve Vice Chairman Stanley Fischer, Mr. Rounds, who is unemployed and says he hasn’t had regular work for years, urged the central bank to keep poor Americans on their minds as they make policy decisions.
“I deal with people who have educated themselves. These people, sir, are inundated with student loans. They’re making just not livable wages or not wages at all,” Mr. Rounds told Mr. Fischer. “We’re desperately needing a stimulant into this economy, and job creation, to get us going.”
Mr. Fischer responded: “That’s what the Fed has been trying to do and will continue to try to do.”
The Fed has kept interest rates near zero since December 2008 and bought more than $3 trillion in government and mortgage bonds to keep long-term rates low, spur investment and boost hiring.
However, recent improvements in the job market and a pickup in inflation have revived debate about when the central bank should begin lifting interest rates from rock-bottom lows. In her speech here Friday, Fed Chairwoman Janet Yellen said if the labor market keeps improving faster than the Fed forecasts the central bank could raise rates sooner than expected. Many investors anticipate the first move in the summer of next year, a perception some top Fed officials have encouraged.
Representatives of the Center for Popular Democracy, a left-leaning national nonprofit organization, said they organized the activists’ trip to Jackson Hole. The participants argued that near-term rate increases could have a deep negative impact on the most vulnerable sectors of the population.
Reuben Eckels, 51, a reverend from Wichita, Kan., said he had come to the conference to tell policy makers “how raising interest rates would affect the community in which I serve.” He and other activists played down the notion of a “skills gap” where workers might not have the qualifications for the jobs available.
“We have young people who are college students in our church who have a 4.0 [grade average], Dean’s list, they can’t find jobs,” he said. “So this is not about just raising the rates so we can offset an imbalance for those elderly who are trying to save their portfolio. This is about people on the street, everyday people … who are just trying to live a good quality of life.”
Shemethia Butler, 34, is one such individual. Hailing from Washington, D.C. the mother of two says she is dealing with extreme stress because the wages she earns at McDonald’s aren’t enough to cover her rent, much less basic expenses like food, electricity and transportation.
“I have no vehicle. My housing situation is stressful. I’m about to lose my apartment. I’m struggling really hard,” she said. “Things may be fine on Wall Street, but they’re not fine on my street.”
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A First for Jackson Hole — Protesters Are Here, and They Don’t Want Rate Hikes
MarketWatch - August 21, 2014, by Greg Robb - Protesters, worried that the central bank is about to put its foot on the brakes, have come to the Federal Reserve’s Jackson Hole retreat this year to...
MarketWatch - August 21, 2014, by Greg Robb - Protesters, worried that the central bank is about to put its foot on the brakes, have come to the Federal Reserve’s Jackson Hole retreat this year to urge the central bank to hold off and give the economy more time to heal. This is believed to be the first time there ever has been protesters at the event.
“We strongly urge the Federal Reserve to reject the calls to raise interest rates and slow the economy down,” said The Center for Popular Democracy, a coalition of 70 organizations, in a letter to Federal Reserve Chairwoman Janet Yellen and her colleagues.
“Although the stock market has roared back to life, and the wealthiest Americans are richer than ever before, too many of us struggle to secure even basic levels of dignity,” the letter said.
Becky Dernbach, 28, an organizer with Neighborhoods Organizing for Change — an advocacy group for low-income residents in Minneapolis — said she came to Jackson Hole to make sure that the voices of average workers were being heard by the Fed.
Kendra Brooks, 42, a resident of Philadelphia who has an MBA but still found herself out of work even after her unemployment benefits ended, said the American dream has “fizzled” in this economy.
“We are not their [the Fed's] primary concern. They are more focused on the top end of the [income] scale,” she said.
The activists said the Jackson Hole protest was the start of a new effort to get officials to understand the economy is broken.
The group held a two-hour meeting with Kansas City Fed President Esther George, who has been one of several regional bank presidents advocating for a rate hike sooner rather than later.
Ady Barkan, a staff attorney with the Center for Popular Democracy, said that the group appreciated the meeting but that the two sides had talked past each other.
George told the group that higher rates might not come soon, but said are coming and will balance the economy, he said.
“That is completely wrong,” Barkan said. The way to combat imbalance in the economy is through strong regulation “not throwing people out of work,” he said.
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