News Column

Yellen: Rate Hike On The Table, But Labor Market Improvement Overstated

August 22, 2014

WASHINGTON (Alliance News) - Federal Reserve Chair Janet Yellen on Friday warned that rate hikes could come sooner than expected if the the US economic recovery is sustained.

"If progress in the labor market continues to be more rapid than anticipated or if inflation moves up more rapidly than anticipated, resulting 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," Yellen said in speech delivered to fellow central bankers at the Fed's annual Jackson Hole symposium

However, the Fed's internal labor market indicators suggest that the recent decline in the unemployment rate overstates the improvement in overall labor market conditions, Yellen said.

She kept the door open for even more stimulus if the economy peters out again, as it did last winter.

"If economic performance turns out to be disappointing and progress toward our goals proceeds more slowly than we expect, then the future path of interest rates likely would be more accommodative than we currently anticipate," she added.

Yellen acknowledged that policy makers that the debate over when to raise rates from near zero for the first time in six years is tricky, and depends on a thorough analysis of slack in the labor market.

"With the economy getting closer to our objectives, the FOMC's emphasis is naturally shifting to questions about the degree of remaining slack, how quickly that slack is to be taken up, and thereby to the question of under what conditions we should begin dialing back our extraordinary accommodation," Yellen said.

Labor force participation remains quite low as too many Americans have given up looking for work, Yellen warned. Because the unemployment rate measures only those trying to find jobs, unemployment may rise from 6.2%, preventing the Fed from tightening.

Hawkish Fed members have been vocal at Jackson Hole this week, with a few expressing concerns that the risks of ultra-easy monetary policy outweigh the benefits.

Fed Bank of St. Louis President James Bullard told Bloomberg Radio that the US central bank may begin tightening monetary policy earlier than officials previously expected.

"The evidence is leading toward an earlier increase than would have been in the works earlier this year," said Bullard. "Labor markets have improved quite a bit relative to what the committee was thinking."

Later on CNBC, Bullard said Bullard said that there is some slack in the labor market but it is "not significant."

Federal Reserve Bank of Kansas City President Esther agrees.

"My objective is not to see rates rise sharply," George said in an interview on Fox Business Network. "But I do think many of the policy benchmarks we look at are already signaling that we should be off of 0," she said.

On the other hand, Atlanta Fed President Dennis Lockhart has warned of the risk of "moving prematurely and snuffing out some progress."

"I have misread the potential for higher growth too many times before" he told Bloomberg Radio. "I want to wait a little bit longer."

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Source: Alliance News

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