If anyone thought Janet Yellen might clarify her view of the job market in her speech here Friday, the Federal Reserve chairwoman had a message:
The picture is still hazy.
Though the unemployment rate has steadily dropped, Yellen suggested that other gauges of the job market have become harder to assess and may reflect persistent weakness. These include many people jobless for more than six months, millions working part time who want full-time jobs and weak pay growth.
Yellen offered no clarity on the timing of the first interest rate increase, which most economists still expect by mid-2015.
Investors had expected a firmer sign from Yellen about whether an improving economy might prompt the Fed to start raising rates sooner than expected. She instead offered further uncertainty. Damage from the Great Recession had complicated the Fed’s ability to assess the job market and made it harder to determine when to adjust rates, Yellen said.
“ Uncertainty is the key word,” said Ian Shepherdson, chief economist at Pantheon Economics. “Yellen is not about to leap from the fence at the next [Fed] meeting.”
Yellen said that for now, a broad assessment of the job market suggests that the economy still needs Fed support through ultralow rates and that inflation has yet to become a concern.
“The assessment of labor market slack is rarely simple and has been especially challenging recently,” Yellen said at the conference, which the Federal Reserve Bank of Kansas City sponsors each year at a lodge beside the majestic Grand Tetons.
Yellen invoked language the Fed has used 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 bond buying is set to end this fall.
Yellen stressed that rate decisions will be dictated by the economy’s performance. Repeating language from an appearance before Congress in July, Yellen said that if the economy improves faster than expected or if inflation heats up, rates could rise sooner. But she also said that if the economy underperforms, the Fed could delay its first hike.
“Monetary policy is not on a preset course,” she said.
In a separate speech, Mario Draghi, head of the European Central Bank, said the ECB was prepared to do more to boost the shaky recovery in the 18 nations that use the euro. But he said governments must coordinate efforts to reduce persistently high unemployment.
The ECB has cut rates and offered cheap loans to banks and is considering asset purchases to pump more money into Europe’s economy. Draghi told the Jackson Hole conference that “we stand ready to adjust our policy stance further” if needed.
In her keynote address, Yellen suggested that pay gains for U.S. workers, 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 tops the Fed’s target of 2 percent, “I don’t think they’re going to panic.”
This year’s conference drew a pocket of demonstrators who shadowed Yellen and the other participants in the lobby of the lodge as they entered and left the invitation-only gathering. They sported green T-shirts and carried placards with the question, “What recovery?”
Related to this year’s conference theme of “Re-evaluating Labor Market Dynamics,” Yellen’s speech addressed the difficulty that the Fed faces in trying to determine the relative health of the job market given the damage caused by the 2007-09 recession.
Paul Dales, senior U.S. economist at Capital Economics, wrote in a research note 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.”
Nicholas Colas, chief market strategist at the investment firm ConvergEx, said Yellen’s speech did nothing to change his expectation that the Fed will begin to raise rates in the second quarter of 2015.
“Janet Yellen is maintaining as much space for herself for policy flexibility as she possibly can,” Colas said. “She’s underlining how complex this is.”