Federal Reserve chairm Janet Yellen gave a much-anticipated speech at the Fed's annual Jackson Hole, Wyo. symposium Friday. The transcript isn't exactly beach reading. Fed officials, wary of spooking antsy stock and bond traders, can be almost maddeningly obscure. But anyone who's following the stock market -- or looking for a job -- should pay attention.
Five years after the financial crisis, the Federal Reserve is still taking extraordinary measures to prop up the economy, including buying up bonds and holding interest rates near zero. Those measures can spur growth as long as the economy isn’t running at full capacity. But once it is, the fear is that they can spur too much inflation.
Officials at the Fed, including the presidents of the regional banks and members of the committee that sets rates, are split into two broad camps. Inflation "hawks" believe it’s time to start weaning the economy from aid. "Doves" favor continued intervention. Earlier this week the release of the minutes of a Fed meeting in late July showed the hawks pressing their point, emphasizing that the economy was improving and raising questions about whether the much-anticipated return to normal interest rates should begin.
Yellen is widely considered a dove. That means on Friday Fed watchers were looking for signs she might be trying to rebut the argument that the economy is running near full tilt. In the event, she seemed to give ammunition to both hawks and doves.
Here are the speech's highlights:
Yellen starts off both cheering the recovery and reminding us how far we may still have to go.
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.
That's pretty dovish.
But in the bulk of her speech she explains reasons why it's hard to get a read on the labor market, starting with the fact so many people have been out of work for so long.
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?
That's subtly hawkish. Here's why: Usually, when the unemployment rate falls more people start looking for work. This time that hasn't happened to the extent one might expect. The worry is, if there's a big group of workers who just aren't going to come back into the work force—because they are just too discouraged, or they don't have the skills for the current jobs on offer, or maybe because they've been replaced by new technology—then maybe there isn't as much "slack" in the economy as the low participation numbers suggest. Even with a comparatively high number of people working, employers could start to feel pressure to raise wages (creating inflationary pressures) to attract and retain the workers who've stayed in the labor force.
Yellen doesn’t answer whether this "structural" worry is justified, but she does flesh out the problem further.
….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.
Translation: Many baby boomers who lost their jobs may simply have decided to retire, rather than seek to reboot their careers.
But then Yellen goes a bit dovish again. She points out that wage growth has in fact been sluggish. That suggests at least some extra slack.
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.
In other words, the Fed is still playing wait-and-see. For investors, that suggests more of the fairly bullish status quo: low rates and a slow unwinding of the "quantitative easing" bond-buying program. For people hoping for the job market to come roaring back, the Yellen's speech sounds a somewhat discouraging note. It suggests that the economy could have shifted into a permanently slower mode, with fewer jobs. Or, at any rate, that there are many at the Fed who are willing to live with that to ensure inflation stays low.