JACKSON HOLE, WYOMING—
U.S. labor markets remain hampered by the effects of the Great Recession and the Federal Reserve should move cautiously in determining when interest rates should rise, Fed Chair Janet Yellen said on Friday in a defense of her policy approach.
In a speech at a central banking conference here, Yellen laid out in detail why she feels the unemployment rate alone is inadequate to evaluate the strength of the U.S. job market.
The jobless rate has fallen faster than expected, but Yellen said the economic disruption of the last five years has left millions of workers sidelined, discouraged, or stuck in part time jobs - facts that are not captured in the unemployment rate alone.
Judging whether the economy is close to full employment is “complicated by ongoing shifts in the structure of the labor market and the possibility that the severe recession caused persistent changes in the labor market's functioning,” Yellen said in the opening address at the Fed's annual economic policy conference.
“Assessments of the degree of remaining slack in the labor market need to become more nuanced because of considerable uncertainty about the level of employment consistent with the Federal Reserve's dual mandate” of stable prices and full employment, she added.
In such an environment “there is no simple recipe for appropriate policy,” Yellen said, arguing for a “pragmatic” approach that allows officials room to evaluate data as it arrives without committing to a preset policy path.
Yellen's speech included lengthy references to the possibility that labor markets may in fact be tighter then they seem, and the Fed may be at risk of having to raise rates sooner and faster than expected.
But overall the remarks marked a defense of her basic premise that the 2007-2009 financial crisis and recession damaged the economy and work force in ways that are not fully understood.
The Fed has held benchmark rates near zero since December 2008, and has said it would wait a “considerable time” after winding down a stimulative bond-buying program in October before raising them. Financial markets currently expect rates to raise around the middle of next year.
The debate over Yellen's evaluation of labor markets - and over when to raise borrowing costs - is intensifying within the Fed's policy committee.
Some policymakers, including Kansas City Federal Reserve Bank President Esther George, the host of the annual conference in Jackson Hole, Wyoming, are becoming more vocal in their view that the Fed risks falling behind and should raise rates soon.
At the central bank's last policy meeting in July, some officials argued against characterizing the amount of slack in the labor market as “significant,” which the Fed did do in its post-meeting statement. Many officials agreed that characterization may have to change soon.
Determining the degree of labor market slack has become the central debate at the U.S. central bank. Yellen wants to be sure employment has recovered as fully as possible before raising rates. Inflation “hawks” at the Fed, however, worry more months of near zero rates will cause inflation or possible asset bubbles.
A slate of academic papers at the conference will dissect the issue over the next two days, arguing for example that the United States' job-generating ability may be on the wane.
Outside the conference room, closed to all but the few dozen attendees from government, foreign central banks, academia and the media, Yellen will get some unexpected support.
A handful of workers in green “What Recovery?” t-shirts are also staying at the resort, pulling policymakers aside as they can in the mountain view bar and main lodge area to press the case that many families are still struggling.