Fed chief voices caution on rates

Harder to read labor market since recession, Yellen says

Federal Reserve Chairman Janet Yellen speaks with a protester as she arrives for dinner Thursday during the Federal Reserve Bank of Kansas City’s conference at the Jackson Lake Lodge near Jackson Hole, Wyo.
Federal Reserve Chairman Janet Yellen speaks with a protester as she arrives for dinner Thursday during the Federal Reserve Bank of Kansas City’s conference at the Jackson Lake Lodge near Jackson Hole, Wyo.

JACKSON HOLE, Wyoming -- Resisting pressure to more quickly tighten monetary policy, Federal Reserve Chairman Janet Yellen said Friday that there was no "simple recipe" for central bank policymakers in deciding when the labor market had improved enough to handle a rise in interest rates.

Yellen said the recession complicated the Fed's ability to assess the U.S. job market and made it harder to determine when to adjust interest rates.

Her remarks to an annual Fed conference offered no signal that she's altered her view that the economy still needs Fed support from ultra-low interest rates. The timing of a Fed rate increase remains unclear, though many economists foresee an increase by mid-2015.

"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," she said, noting that July's 6.2 percent unemployment rate was down nearly 4 percentage points since 2009.

She noted that while the unemployment rate has steadily declined, other gauges of the job market have been harder to evaluate and may reflect continued weakness. These include high levels of people who have been unemployed for more than six months, many people working part time who would like full-time jobs and weak pay growth.

Yellen repeated language the Fed has used at its last meeting that record-low short-term rates will likely remain appropriate for a "considerable time" after the Fed stops buying bonds to keep long-term rates down. The Fed's bond buying is set to end this fall.

But Yellen said the Fed's rate decisions will be dictated by how the economy performs.

"Monetary policy is not on a preset course," she said. The Fed "will be closely monitoring incoming information on the labor market and inflation in determining the appropriate stance of monetary policy."

Yellen also suggested that pay gains, which have been sluggish since the recession ended five years ago, could rise faster without necessarily igniting inflation.

John Silvia, chief economist at Wells Fargo, said Yellen's remarks confirmed his view that the Fed's first rate increase will occur next June.

"Yellen still wants more time to evaluate the data," he said.

Silvia also said the speech hints that the Fed is "willing to take a little more inflation to achieve their labor market goals." If inflation were to top the Fed's target of 2 percent, "I don't think they're going to panic."

Yellen delivered her remarks at the opening of the annual conference sponsored by the Federal Reserve Bank of Kansas City, Mo., at a lodge with a backdrop of the Grand Teton Mountains.

This year's conference drew a small group of demonstrators that shadowed Yellen and the other participants in the lobby of the lodge as they entered and left the invitation-only gathering.

This year's conference was devoted to the subject "Re-evaluating Labor Market Dynamics," and Yellen's speech addressed the difficulty the Fed faces in trying to determine the relative health of the job market given the damage caused by the 2007-09 recession.

She cited "considerable uncertainty about the level of employment consistent with" the Fed's goal of maximum employment and stable prices.

Paul Dales, senior U.S. economist at Capital Economics, wrote in a research note Friday that "despite the faster-than-expected decline in the unemployment rate, Yellen does not appear to have changed her view that there is still 'significant' slack in the labor market."

Yellen's comments came two days after release of the minutes of the Fed's July 29-30 meeting. Those minutes showed that officials engaged in an intensifying debate over whether to raise rates sooner than expected if the economy keeps strengthening.

Some officials, the minutes said, thought the Fed would need "to call for a relatively prompt move" to begin raising short-term rates from record lows, where it has kept them since the financial crisis struck in 2008. Otherwise, they felt the Fed risked overshooting its targets for unemployment and inflation.

In the end, the Fed made no changes at the July meeting. It approved, 9-1, maintaining its current stance on rates. But the minutes pointed to a distinct division among officials over the timing of an increase.

That debate has continued at Jackson Hole, with Fed officials expressing clashing views during a series of TV interviews before the conference began with a reception and dinner Thursday night.

Charles Plosser, president of the Fed's Philadelphia regional bank, said he was uncomfortable with the Fed's current policy statement that it expects to keep its key short-term rate unchanged for a "considerable time" after its bond purchases end. Plosser cast the lone dissenting vote at the July meeting.

In an interview with CNBC, Plosser said he felt the Fed was "running a very risky policy" given the steady signs of strength in the economy.

"I would prefer to begin raising rates sooner and raise them more gradually," he said.

St. Louis Fed President James Bullard said Thursday in an interview in Jackson Hole that interest rates may have to rise earlier than policymakers had anticipated.

"The evidence is leading toward an earlier increase than would have been in the works earlier this year," he said. "Labor markets have improved quite a bit relative to what the committee was thinking."

Information for this article was contributed by Martin Crutsinger, Matthew Brown, Christopher S. Rugaber and Paul Wiseman of The Associated Press; by Jim Puzzanghera of the Los Angeles Times; and by Jeff Kearns and Craig Torres of Bloomberg News.

Business on 08/23/2014

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