After the anxious days of speculation over the possible policy signals to be taken from Federal Reserve Chair Janet Yellen’s speech on “Labor Markets Dynamics and Monetary Policy” this morning in Jackson Hole, it almost feels a bit anti-climactic after taking the time to print it out to read more closely than a fast skim on a screen permits.
*** We took Chair Yellen’s speech to be fairly dovish in its leanings, as might be expected, but perhaps not to the degree of (pre-July Minutes) market expectations. Perhaps more importantly, Yellen’s speech looks to have carefully positioned her more to the center of the still evolving consensus of the Federal Open Market Committee.***
*** That, in turn, creates some optionality to adjust as needed depending on the data and forecasts, and should lend her and those dovish leanings maximum influence in the debate over the forward policy guidance to come in September and probably through the end of the year. ***
*** In any case, nothing in Chair Yellen’s speech — or the July Minutes for that matter — pushes off the view that, barring an unexpected acceleration or disappointing downshift in the data, the long awaited rate lift-off is coming in either June or September next year. ***
A Few Takeaways
First, she did make a point as expected to acknowledge “the economy [is] getting closer to our objective.” And in the policy implications second half of the speech, she went out of her way to stress the policy path remains “data-dependent,” giving few clues or policy signals beyond such a balanced take that there was enough there to keep both hawks and doves happy.
That in some sense indirectly reflects what we sensed (SGH 7/24/14, “Fed: Calibrating the Guidance for Lift-off”) was a summer shift underway in the balance of views within the FOMC towards thinking in terms of the timing to a rate tightening and away from worrying about the persistence in low inflation and the needed level of support to sustain the recovery.
At the same time, not to get too carried away with that thought, it would be hard not to notice Chair Yellen sure thinks there is a lot of uncertainty in how to get a read on the labor market developments; that assessment is “challenging,” “difficult,” “imprecise,” “rarely simple,” and “subject to revision.” Again, as we noted earlier, that accent on uncertainty suggests to us a cautious reaction function as the Fed gets closer to its mandate objectives, namely a strong inclination to guard against a premature signal to a tightening – especially when as she noted, inflation is still running under its medium term target.
And on that theme, in the more revealing first half of the speech on interpreting the labor market, Chair Yellen did in fact consistently lean dovish in the way she set up the contrasting ways in how to interpret the slack in the labor market. In every instance, she always put an accent on the reasons slack, participation, and weak wage growth were probably due to weak cyclical demand rather than structural or more permanent trends (i.e. in our High School Debate Club — yes, we were in the debate club — we were always taught to list second and last the point you want to leave in the minds of your listeners and readers).
And she almost sounded relieved she could refer to the hard fought sentence that made it into the July statement affirming the “significant underutilization of labor market resources,” as though reminding everyone, including some of her more vocal Committee colleagues, that she is not alone in believing not only there is underutilized labor, but that it remains significant (i.e. memo to Philadelphia’s Charles Plosser). We will see how long that qualifier “significant” stays in the statement, but, well, it is for now.
A Hint to a Guidance Compromise?
And along that same thought, the best phrase of the speech — “there is no simple recipe” for the appropriate policy stance — was perhaps not only a gentle way to push back on the “rules-based” arguments, but that could also be applied to the simplistic “considerable time” phrasing in the forward guidance and its well-entrenched assumption that it means six months.
With the end to the bond purchases looming, might the FOMC be looking at a broader revamp to the guidance and the statement in September rather than clever Thesaurus-driven tweaks here and there?
Just a thought to end with, just as one would in debate class.