Yellen’s Speech Was Balanced, Yet Dovish

Fed Chair Janet Yellen delivered a balanced speech regarding the US labor market and monetary policy in the Jackson Hole symposium. She acknowledged that recent labor market data have performed better than the Fed’s forecasts and discussed the cyclical and structural factors contributing to the current employment situation. Yellen judged that cyclical factors remained prominent as significant underutilization remains. Therefore, policymakers should stay patient to the gradual move toward the exit. Overall, the comments have not changed the dovish stance of the Fed and have not done much to alter the central bank’s monetary policy outlook.

Yellen discussed the structural and cyclical components of labor force participation, the extent of part-time employment for economic reasons, and labor market flows, such as the pace of hires and quits. While noting that assessments of the degree of remaining slack in the labor market have become ‘more nuanced’ due to the ‘considerable uncertainty about the level of employment consistent with the Federal Reserve’s dual mandate’, she believed that cyclical factors remained dominant, a notion reflected in the FOMC statement.

The Fed considered that monetary policy ‘ultimately must be conducted in a pragmatic manner’, i.e. if the labor market conditions result in ‘faster convergence toward our dual objectives, then increases in the federal funds rate target could come sooner than the Committee currently expects and could be more rapid thereafter’, but also later if the data disappoint. This exemplified that Fed’s assessment of labor market slack has to become more nuanced and was was also consistent with Yellen’s previous comments that there’s no single indicator of the labor market that can summarize the actual employment condition.

On the whole, Yellen touched a number of topics in her speech, presenting arguments and counterarguments on issues including labor force participation, wage pressures and consumer inflation. However, the core view on the labor market situation and the monetary policy has not changed from her previous comments. While admitting ‘there is no simple recipe for appropriate policy’ in the complex and uneven nature of recovery, she was firm in that ‘the need for extraordinary accommodation’ was unambiguous’.

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