The Federal Reserve should move cautiously in deciding when to raise interest rates given the US labour market remains bruised from the Great Recession, Fed Chair Janet Yellen said on Friday amid calls from policy hawks for a near-term rate hike.
In a speech at the Fed’s annual central bank conference, Yellen laid out in detail why she feels the unemployment rate alone is inadequate to evaluate the strength of the jobs market and why the central bank needs to step gingerly.
Her remarks were followed by a speech by the head of the European Central Bank, Mario Draghi, who said the ECB was ready to use all the tools at its disposal to lift euro zone inflation if it continued to drop. He said, however, that most factors that had weighed on prices appeared temporary.
Together, the comments from Yellen and Draghi underscored how both central banks were wrestling with the complexities of labour markets still-wracked by the 2007-2009 financial crisis.
Yellen stood by her view that significant slack remains in the US economy, even as she nodded to the counter-arguments of some of her colleagues who feel labour markets are tighter than she believes and inflation a risk.
“There is no simple recipe for appropriate policy,” she said, arguing for a “pragmatic” approach that focuses on incoming data without committing to a preset policy path.
Ahead of her comments, a number of top Fed officials pressed their case for an early hike in benchmark rates, which the US central bank has held near zero since December 2008.
Philadelphia Fed President Charles Plosser, a voting member of the Fed’s policy panel this year, and two non-voters – St. Louis Fed President James Bullard and Kansas City Fed President Esther George – all sounded warnings on the risk of falling behind the curve.
“I’d rather see us start to raise rates earlier and try to go slow than to wait until the last minute,” Plosser told Reuters in an interview in Jackson Hole.
Labour market slack
Yellen said the Fed was struggling to determine the degree to which the still-soft US labour market was suffering from long-term structural shifts beyond the central bank’s reach as opposed to more temporary factors that low rates could address.
Given the uncertainty, she said assessments of the labour market “need to become more nuanced.” Some officials argue the welter of labour market data Yellen likes to parse offers little useful information beyond the jobless rate and pace of hiring.
Financial market reaction to Yellen’s remarks was muted, with prices for US stocks and most Treasury securities largely unchanged. The dollar, however, moved higher, while the yield on the 30-year Treasury bond fell.
“Janet Yellen confirmed the majority view of the (Fed’s policy committee): much more labour recovery is needed before the Fed raises policy rates,” said David Kotok, chairman of Cumberland Advisors in Sarasota, Florida.
Draghi’s remarks, in contrast, marked a rhetorical escalation regarding the ECB’s readiness to take further steps to bolster a euro zone economy that failed to grow in the second quarter and which has seen inflation drop to just 0.4 percent.
The ECB, he said, would “use all the available instruments needed to ensure price stability over the medium term.”
Still, he largely focused on the plight of labour markets, calling for a more cohesive response from policymakers across the single currency bloc to tackle unemployment.
“The way back to higher employment … is a policy mix that combines monetary, fiscal and structural measures at the union level and at the national level,” he said.
Yellen’s speech included lengthy references to the possibility the US labour market may in fact be tighter then it seems, and she acknowledged the Fed may have to raise rates sooner and faster than expected.
But, overall, Yellen’s remarks marked a defense of her premise that significant slack remained in the jobs market, even though she said the 2007-2009 financial crisis and recession damaged the economy and work force in ways not fully understood.
The Fed has said it would wait a “considerable time” after winding down a stimulative bond-buying program in October before raising rates. Financial markets currently expect a rate hike around the middle of next year.
Determining the degree of labour market slack has become the central debate at the Fed. Yellen wants to be sure employment has recovered as fully as possible before raising rates.
In contrast, the inflation “hawks” worry that more months of near-zero rates will cause inflation or possible asset bubbles.
“If we’re trying to solve a labour market problem, (Yellen’s) speech enumerated just how hard that is,” Plosser told Reuters. “Some of the things she alluded to we just can’t fix.”