JACKSON HOLE, Wyoming — Federal Reserve Chair Janet Yellen said Friday that the Great Recession complicated the Fed’s ability to assess the U.S. job market and made it harder to determine when to adjust interest rates.
Yellen’s remarks to an annual Fed conference offered no signal that she’s altered her view that the economy still needs Fed support from ultra-low interest rates. The timing of a Fed rate increase remains unclear, though many economists foresee an increase by mid-2015.
The Fed chair noted that while the unemployment rate has steadily declined, other gauges of the job market have been harder to evaluate and may reflect continued weakness. These include high levels of people who have been unemployed for more than six months, many people working part time who would like full-time jobs and weak pay growth.
Yellen repeated language the Fed has used at its last meeting 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 Fed’s bond buying is set to end this fall.
But Yellen said the Fed’s rate decisions will be dictated by how the economy performs.
“Monetary policy is not on a preset course,” she said. The Fed “will be closely monitoring incoming information on the labor market and inflation in determining the appropriate stance of monetary policy.”
Yellen also suggested that pay gains, 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 were to top the Fed’s target of 2 percent, “I don’t think they’re going to panic.”
Yellen delivered her remarks at the opening of the annual conference sponsored by the Federal Reserve Bank of Kansas City at a lodge with a backdrop of the Grand Teton Mountains.
This year’s conference drew a small group 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?”
This year’s conference was devoted to the subject, “Re-evaluating Labor Market Dynamics,” and Yellen’s speech addressed the difficulty the Fed faces in trying to determine the relative health of the job market given the damage caused by the 2007-2009 recession.
She cited “considerable uncertainty about the level of employment consistent with” the Fed’s goal of maximum employment and stable prices.
Paul Dales, senior U.S. economist at Capital Economics, wrote in a research note Friday 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.”
Yellen’s comments came two days after release of the minutes of the Fed’s July 29-30 meeting. Those minutes showed that officials engaged in an intensifying debate over whether to raise rates sooner than expected if the economy keeps strengthening.
Some officials, the minutes said, thought the Fed would need “to call for a relatively prompt move” to begin raising short-term rates from record lows, where it has kept them since the financial crisis struck in 2008. Otherwise, they felt the Fed risked overshooting its targets for unemployment and inflation.
In the end, the Fed made no changes at the July meeting. It approved, 9-1, maintaining its current stance on rates. But the minutes pointed to a distinct division among officials over the timing of an increase.
That debate has continued at Jackson Hole, with Fed officials expressing clashing views during a series of TV interviews before the conference began with a reception and dinner Thursday night.
Charles Plosser, president of the Fed’s Philadelphia regional bank, said he was uncomfortable with the Fed’s current policy statement that it expects to keep its key short-term rate unchanged for a “considerable time” after its bond purchases end. Plosser cast the lone dissenting vote at the July meeting.
In an interview with CNBC, Plosser said he felt the Fed was “running a very risky policy” given the steady signs of strength in the economy.
“I would prefer to begin raising rates sooner and raise them more gradually,” he said.
Esther George, president of the Kansas City Fed, which sponsors the Jackson Hole conference, said in an interview on the Fox Business Network that she also thought the Fed needed to “begin sooner rather than later” raising rates to give the economy time to adjust after a prolonged period of low rates. George, like Plosser, is viewed as a “hawk” — someone who thinks the Fed should be more concerned about avoiding high inflation than about continuing to try to boost the economy.
John Williams, president of the San Francisco Fed, said in a separate interview on CNBC that he thought, based on his own forecasts of the economy’s performance, that a “reasonable guess” for the first rate hike would be next summer. But he said that the timing would ultimately depend on economic data and that if the economy accelerates, the Fed could act sooner.
Williams has been a supporter of the majority of officials who back Yellen’s view that the job market still isn’t healthy enough for the Fed to start boosting rates.
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 short-term 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.”