Yellen's 3 highlight challenge Fed faces

FILE - In this Dec. 17, 2014 file photo, Federal Reserve Chair Janet Yellen speaks with reporters at the Federal Reserve in Washington. The Federal Reserve ended 2014 with a pledge to be “patient” in raising interest rates from record lows. The way things are going, its patience may endure for a long while. (AP Photo/Cliff Owen, File)
FILE - In this Dec. 17, 2014 file photo, Federal Reserve Chair Janet Yellen speaks with reporters at the Federal Reserve in Washington. The Federal Reserve ended 2014 with a pledge to be “patient” in raising interest rates from record lows. The way things are going, its patience may endure for a long while. (AP Photo/Cliff Owen, File)

WASHINGTON -- In her first speech as Federal Reserve chairman last March, Janet Yellen told the stories of three Chicago residents struggling to recover from the recession to explain why she intended for the Fed to retreat slowly from its stimulus campaign.

Almost a year later, the three people highlighted by Yellen are still struggling, but their fortunes are gradually improving. All are working, though for less money than before the recession.

Jermaine Brownlee, 40, has found full-time work building bus seats, although he makes a third less than he did in his old job building houses.

"I'm back full time, and I'm grateful that I'm employed," Brownlee said in an interview last week. "It's just that before I had the job I was saying, 'If I could just have a job. ...' And now that I have the job, I'm saying, 'If it could pay me just a little bit more money. ...'"

As Yellen and her colleagues convene today and Wednesday for their first policy meeting of 2015, the stories of the three workers highlight the economy's progress under the Fed's patient care and the reality that the recovery remains incomplete.

The Fed has signaled that it would like to start raising its benchmark interest rate around midyear. Analysts expect the Fed to strengthen that signal Wednesday.

The economic expansion has accelerated with each passing year, and the decline in unemployment is outstripping the Fed's expectations.

But the sluggish pace of inflation and of wage growth is weighing on those plans. The slow increases in prices and wages, if they continue, would mean that the Fed has yet to accomplish its own goals.

In the face of that reality, Fed officials are increasingly emphasizing that raising the benchmark rate above zero for the first time since December 2008 will not be the end of the stimulus campaign. Officials say they plan to raise rates slowly, as conditions improve, and that rates will remain unusually low for years.

"I think it's important to understand that a decision to raise rates will not constitute the throwing of a switch from easy money conditions to tight," Dennis P. Lockhart, president of the Federal Reserve Bank of Atlanta, said this month. "I supported, and expect to continue to support, a patient approach, one that is relatively cautious and conservative as regards the pace of normalization of rates."

When Dorine Poole spoke with Yellen last year, she was working 30 hours a week as an office manager for UrbanPonics, a company created to grow lettuce in an old industrial building. She has two children, cares for her mother and was making $14,000 a year.

Then, in June, the company closed -- but Poole did not miss a single day of work. She was hired immediately as a full-time office manager by New Covenant Community Development Corp., another post-recession startup formed to encourage small-business creation in the North Lawndale neighborhood where she lives.

She now makes almost $20,000 a year -- closer to the $32,000 she made as an insurance claims processor before the recession.

"I caught a great break," Poole, 39, said. "It's a real step up."

The unemployment rate, which fell to 5.6 percent in December, is approaching its pre-recession level of about 5 percent, but there is little evidence that employers are competing for workers by raising wages.

Average hourly earnings, adjusted for inflation, rose by 1 percent in 2014 -- but even that was largely because of the unusual weakness of inflation. Falling oil prices have increased the value of the average paycheck, but it is a windfall, not a sustainable trend.

Some Fed officials have begun to caution that they are not ready to raise interest rates until wages and price inflation strengthen.

"I believe the continued very low core inflation and wage growth numbers provide ample justification for patience," Eric S. Rosengren, president of the Boston Fed, said in a speech this month. "Such patience also provides support to labor markets, boosting the prospects of the many Americans who were adversely impacted by the financial crisis, severe recession and slow recovery."

Business on 01/27/2015

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