Via FTAlphaville, Credit Suisse lists Janet Yellen’s labour market statements going into the Fed’s annual pow wow at Jackson Hole:
Conditions under which the Fed would tighten sooner and faster
“If the labor market continues to improve more quickly than anticipated by the Committee, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned. Conversely, if economic performance is disappointing, then the future path of interest rates likely would be more accommodative than currently anticipated.” From Yellen’s Semi-annual monetary policy testimony to Congress, July 15, 2014
(All remaining quotes below are from Yellen’s post-FOMC press conference on June 18, 2014 unless otherwise specified.)
Underutilization of labor
“In the labor market, conditions have improved further. The unemployment rate, at 6.3 percent, is four-tenths lower than at the time of our March meeting, and the broader U-6 measure—which includes marginally attached workers and those working part time but preferring full-time work—has fallen by a similar amount. Even given these declines, however, unemployment remains elevated, and a broader assessment of indicators suggests that underutilization in the labor market remains significant.”
Cyclical labor force participation declines
“That said, many of my colleagues and I would see a portion of the decline in the unemployment rate as perhaps not representing a diminution of slack in the labor market. … I think a portion of the decline we’ve seen in the unemployment rate probably reflects a kind of shadow unemployment or discouragement, a cyclical part of labor force participation. Now, if that’s correct, we may see that as the economy picks up steam and we see further recovery in the labor market, that those, let’s call them discouraged workers, will return either to unemployment or to employment. And as labor force participation begins to stabilize, the unemployment rate will come down less quickly. And I think for a number of people, that’s a component of the forecast.”
Long-term unemployment / hysteresis
“A very large fraction of those unemployed have been unemployed for more than six months. And there is the fear that those individuals find it harder to gain employment, that their attachment to the labor force may diminish over time and the networks of contacts that are — they have that are helpful in gaining employment can begin to erode over time. We could see what’s known as hysteresis, where individuals, because they haven’t had jobs for a long time, find themselves permanently outside the labor force. My hope would be that as — and my expectation is that as the economy recovers, we will see some repair of that, that many of those individuals who were long – term unemployed or those who are now counted as out of the labor force would take jobs if the economy is stronger and would be drawn back in again, but it is conceivable that there is some permanent damage there to them, to their own well – being, their family’s well – being, and the economy’s potential.”
Potential for faster wage growth
“My own expectation is that as the labor market begins to tighten, we will see wage growth pick up some to the point where real wage growth, where compensation or nominal wages are rising more rapidly than inflation, so households are getting a real increase in their take-home pay… that might be signs of a tighter labor market. Within limits, it’s not a threat to inflation because consistent with the level of inflation we have for our 2 percent inflation objective, we could see wages growing at a…somewhat more rapid rate…”
Working part-time for economic reasons
“Moreover, both the share of the labor force that has been unemployed for more than six months and the number of individuals who work part time but would prefer a full-time job are at historically high levels.” From Yellen’s testimony before the Joint Economic Committee, May 7, 2014
Relationship between slack and wage growth
Yellen may also cite new research out of the Chicago Fed, indicating that “the slack in the jobs market still weighs heavily on the real wage prospects of U.S. workers.” The hawkish twist would be if she combines discussion of this paper with her June 18 comments (above) on her expectations for wage growth accelerating as the labor market tightens.
Markets rightly see Jackson Hole as a flock of doves, and so are off to the races again!
