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Business News/ News / World/  Janet Yellen facing hard call on when labour market has healed
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Janet Yellen facing hard call on when labour market has healed

Yellen underscored the Federal Open Market Committee statement last month that 'underutilization of labour resources still remains significant'

Fed chair Janet Yellen said slack remains in the US labour market even after gains made during the five years of economic recovery. Photo: BloombergPremium
Fed chair Janet Yellen said slack remains in the US labour market even after gains made during the five years of economic recovery. Photo: Bloomberg

Washington: Federal Reserve chair Janet Yellen said she still isn’t satisfied with the US labour market. Deciding when she is won’t be easy.

“The labour market has yet to fully recover," Yellen said on Friday in a speech at the Kansas City Fed’s annual conference in Jackson Hole, Wyoming. While the five-year expansion has put more Americans back to work, “a key challenge is to assess just how far the economy now stands from attainment of its maximum employment goal."

Her comments echoed the message from minutes of the July Federal Open Market Committee (FOMC) meeting, which showed officials growing more aware that labour markets are returning to health. She said policy makers will have to look at a wide range of indicators to make that assessment, adding that there’s no simple recipe for deciding when to raise interest rates for the first time since 2006.

Yellen also emphasized the need for flexibility: If progress “continues to be more rapid than anticipated," an interest rate increase could come sooner than currently expected and further increases could be more rapid, she said. Conversely, if the Fed’s goals of full employment and stable prices remain elusive, policy would be more accommodative.

“It is a more balanced assessment than she has given in recent quarters," said Michael Gapen, senior US economist at Barclays Capital Inc. and a former member of the Fed Board staff. “One takeaway: the closer the committee gets to full employment, the more difficult it is to give concrete guidance on the outlook for interest rates," Gapen said.

Communications Challenge

Yellen acknowledged that challenge, saying that officials are “particularly attentive to the need to clearly describe the policy framework we are using."

Stocks remained lower after her remarks. The Standard & Poor’s 500 Index declined 0.1% to 1,991.31 as of 1:21 pm in New York. The yield on the 10-year treasury note was down one basis point, or 0.01 percentage point, to 2.40%.

Policy makers in June projected that the benchmark interest rate would rise sometime next year. They have kept the rate close to zero since December 2008.

In her remarks, Yellen repeated the FOMC statement that “underutilization of labour resources still remains significant." Much of her 16-page speech walked through measures of labour-market slack that Yellen uses—such as the number of people employed part-time who prefer full-time work—and how much of that slack might be related to weak demand as opposed to longer-term trends.

Aging Workforce

“Significant structural factors have affected the labour market, including the aging of the workforce and other demographic trends," she said.

For some of the so-called structural changes, she presented a counter-argument on why they could also reflect cyclical trends. Disability applications may reflect perceptions of poor job prospects, she said. Bad job opportunities may have brought forward retirements, she said, and so the aging workforce may contribute less to declining labor participation in future years.

Yellen said wage movements have historically been sensitive to labour-market supply. Despite steady increases in payrolls, wage gains have been moderate, pointing to weaker labour market conditions than indicated by the 6.2% unemployment rate.

Wage Deflation

However, she added, pent-up wage deflation could also be holding down wage growth as firms find they don’t have to offer much higher pay to attract and keep qualified workers.

Minutes of the July FOMC meeting released on 20 August showed some Fed officials were increasingly uncomfortable with the FOMC’s forward guidance that calls for keeping its benchmark interest rate low for a considerable time.

Because measuring slack is an inexact science, the debate on the committee is likely to intensify if labor markets continue to improve.

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

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

Atlanta Fed’s Dennis Lockhart, in a separate interview on Thursday, warned of the risk of “moving prematurely and snuffing out some progress." Lockhart will vote on policy next year and Bullard in 2016.

Rate Estimates

The median estimate of policy makers released after their June meeting shows they project the benchmark federal funds rate to rise to 1.13% at the end of 2015 and to 2.5% a year later.

FOMC participants will release their next set of quarterly projections on growth, employment, inflation and the rate outlook after the next meeting on 16-17 September, which will also be followed by a Yellen press conference.

The decline in the unemployment rate has surprised Fed officials, who projected in December that it would fall to 6.3% to 6.6% by the end of this year.

Other gauges Yellen watches continue to show weakness. The labour force participation rate, at 62.9% last month, is near the lowest since 1978. Average hourly earnings are 2% higher than a year ago, barely outpacing the 1.6% annual gain in the Fed’s main inflation gauge.

Policy Shifts

This year’s Jackson Hole conference is titled Re- Evaluating Labor Market Dynamics. Past gatherings foreshadowed some of the biggest policy shifts since the financial crisis. In 2010 and 2012, then-chairman Ben S. Bernanke signalled new bond buying that has pumped up the Fed’s balance sheet to $4.41 trillion.

European Central Bank (ECB) president Mario Draghi and Bank of Japan governor Haruhiko Kuroda are among the speakers at the three-day symposium held by the Kansas City Fed that began on Thursday. Bloomberg

Christopher Condon in Washington, Kathleen Hays and Michael McKee in New York and Aki Ito in San Francisco also contributed to this story.

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Published: 22 Aug 2014, 07:57 PM IST
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