In a much-anticipated speech in Jackson Hole the Fed Chair Yellen repeated the balanced discussion of the monetary policy outlook expressed in her congressional testimony in July. Hence, her speech today did not reflect the more hawkish tone of the July FOMC minutes, released earlier this week, where the discussion seemed to focus on the possibility of earlier increases and not later increases. Yellen’s comments made clear that she isn’t ready to start raising rates.
Thus if progress in the labour market continues to be more rapid than anticipated by the FOMC or if inflation moves up more rapidly than anticipated, then rate increases could come sooner than the FOMC currently expects and could be more rapid thereafter, Yellen said. On the other hand, if economic performance disappoints, rate increases might be delayed, Yellen suggested.
Yellen acknowledged that the labour market has improved more rapidly than anticipated by the Fed. However her comments made clear that she isn’t ready to start raising rates, because the Fed still sees significant slack in the labour market.
However, because of the severe recession may have caused persistent change to the labour market there is “no simple recipe for appropriate policy,” Yellen said. Thus, judging the degree of slack in the economy is currently particularly hard, she argued, because of shifts in labour force participation, part-time employment, the demographics of the workforce, wage growth and broader measures of labour market dynamism. “A considerable body of research suggests that the behaviour of these and other labor market variables has changed since the Great Recession,” she said, complicating her decisions.
“Monetary policy ultimately must be conducted in a pragmatic manner that relies not on any particular indicator or model, but instead reflects an ongoing assessment of a wide range of information in the context of our ever-evolving understanding of the economy.” Hence, monetary policy remains data dependent, as we already knew, of course.
Going forward, all eyes will remain on inflation data and especially wage data as this well certainly set the stage for how fast the Fed will normalise policy. Until Yellen sees clear evidence of higher wage increases, she will likely remain content with normalising policy slowly.
We continue to believe that the Fed is underestimating inflation risks. Thus we still expect the Fed to turn more hawkish later this year and that markets will start pricing in more rate increases from the Fed as the economy continues to strengthen and the geopolitical concerns fade.
Nordea