Yellen cites uncertainty
CLEVELAND — In a speech Tuesday marked by large doses of both statistics and humility, Federal Reserve Chairwoman Janet L. Yellen said that the economic outlook is highly uncertain, suggesting that the central bank will proceed slowly in raising interest rates and scaling back easymoney policies.
The Fed has been moving to reduce monetary support for the economy based on an assessment that the labor market is strengthening and that inflation, which has been unusually low, will soon stabilize.
Last week, the Fed announced it would begin unwinding the massive bondbuying effort it began after the financial crisis of 2007-08 and signaled that another interest rate hike, after two small increases this year, would come by December’s end. Policymakers foresee three rate hikes for next year.
But Yellen suggested that the future policy course was uncertain.
“My colleagues and I may have misjudged the strength of the labor market,” she said at a conference of the National Assn. for Business Economics in Cleveland. She said the same about “the degree to which longerrun inflation expectations are consistent with our inf lation objective, or even the fundamental forces driving inflation.”
Inflation has been running persistently below the Fed’s 2% target, puzzling economists and causing policymakers to be hesitant in raising rates. Yellen said that she still expected inflation to move up to the Fed’s desired goal in coming months, but she noted that the labor market, which historically has been closely linked to inflation, may not be as tight as the low unemployment rate suggests.
In the last five months, the nation’s jobless figure has vacillated between 4.3% and 4.4%, a level most Fed officials see as essentially full employment, in which almost everyone capable and willing to work has a job.
Yet even as more employers have been reporting trouble finding workers, there’s been little indication of a pickup in wage increases, which on average have remained modest, rising at an annual pace of about 2.5%.
Because of demographic and other structural changes, Yellen said, “the unemployment rate that is sustainable today may be lower than the rate that was sustainable in the past.”
The low rate of wage increases could indicate that the labor market has more slack than economists had believed — something at which Yellen got a close-up, nonstatistical look later in the day.
After addressing the gathering of largely professional economists, Yellen went to a manufacturing job-training center at Cuyahoga Community College in the more gritty eastern part of the city.
Job developers and community leaders at Cuyahoga spoke about an array of economic and social barriers, including the opioid drug problem, population decline, and most acutely the lack of worker skills which hampers many employers who want to hire.
Yellen, in her speech, said that the subdued wage growth probably reflects the sluggish productivity in recent years, but she also said that some employers have responded to the difficulty in finding qualified workers by expanding training and offering signing bonuses — “possible harbingers of stronger wage gains to come.”
Getting a fix on wage trends will help the Fed’s policymaking. But there are other uncertainties affecting the inf lation outlook, she said.