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Fed Chief Sees Not Enough Data to Raise Rates

By BINYAMIN APPELBAUMAUG. 22, 2014

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JACKSON HOLE, Wyo. — Janet L. Yellen, the Federal Reserve chairwoman, said on Friday that the economy was improving but that the Fed was awaiting more evidence about the health of labor markets before deciding when to start raising interest rates.

Ms. Yellen’s first keynote speech at the annual conference here in the shadow of the Grand Tetons was mostly an extended explanation of the reasons for the Fed’s caution, and an effort to buy time for the Fed to deliberate. She emphasized her view that no single factor, including inflation, could be used to judge the recovery.

“While these assessments have always been imprecise and subject to revision, the task has become especially challenging in the aftermath of the Great Recession,” she said, both because of the downturn’s “nearly unprecedented” depth and because of simultaneous changes in the economy separate from the ups and downs of the business cycle, including the aging of the work force.

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• Text of Janet L. Yellen's Speech

Ms. Yellen broke little new ground in her speech. She reiterated the Fed’s basic guidance after its July meeting that holding short-term interest rates near zero remains necessary and useful to increase employment. She said the gap between current conditions and a return to full health was still “significant.”

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Janet L. Yellen, the Fed chairwoman, speaks with Ady Barkan, a lawyer with the Center for Popular Democracy, which held a demonstration at the conference. Credit John Locher/Associated Press

Acknowledging the uncertainty surrounding this assessment, Ms. Yellen added that the Fed was prepared to adjust its stance as the economic evidence became clearer, either moving more quickly to raise rates or holding steady for even longer. She said the Fed expected to end the expansion of its bond holdings in October.

Investors generally expect the Fed to start raising interest rates in the summer of 2015, or slightly later, based on asset prices tied to the level of future rates. John Williams, the president of the Federal Reserve Bank of San Francisco and a prominent centrist, told CNBC on Friday that was still a “reasonable guess.”

Another centrist, Dennis P. Lockhart, president of the Federal Reserve Bank of Atlanta, said in an interview on Friday that Ms. Yellen’s speech “did not break a lot of new ground,” because the Fed’s trajectory depended on the economy. “I’m still someone who thinks midyear is the most likely timing,” Mr. Lockhart said.

Some analysts, however, viewed Ms. Yellen’s speech — along with the minutes of the Fed’s July meeting, released on Wednesday — as evidence that the Fed had become a little more likely to raise rates earlier, if the economy kept gaining strength.

“We do not believe she has changed her core views,” Michael Gapen, director of United States economic research at Barclays, wrote on Friday in a note to clients after Ms. Yellen’s speech, “but see the change in tone as a normal evolution based on the fact that the Fed is closer to achieving its dual mandate than at any point in the recovery and has found itself at this stage faster than expected.”

Ms. Yellen’s audience on Friday included several internal critics of the stimulus campaign, including her host, Esther George, the president of the Federal Reserve Bank of Kansas City, which sponsors the annual conference, and Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia, who dissented at the last meeting of the Fed’s policy-making committee. Both argue that the Fed has neared the limits of its ability to improve the health of the economy and that persisting in its efforts could loosen the central bank’s control over price inflation.

Ms. Yellen’s optimism that Fed policy can increase employment and wages is also challenged by a growing body of economic literature contending that the decline in the share of the working-age population in jobs stems largely from factors that predate the recession and cannot be addressed by continuing to hold down interest rates.

The economists Stephen J. Davis, of the University of Chicago, and John C. Haltiwanger, of the University of Maryland, argued in a paper presented on Friday at the conference that employment levels had declined because the labor market has stagnated in recent decades. Fewer people are leaving or losing jobs, and fewer are taking new ones.

“These results,” they wrote, “suggest the U.S. economy faced serious impediments to high employment rates well before the Great Recession, and that sustained high employment is unlikely to return without restoring labor market fluidity.”

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Esther George, president of the Federal Reserve Bank of Kansas City, wants the Fed to pull back from its stimulus efforts. Credit Kansas City Federal Reserve, via Reuters

Ms. Yellen noted their work in her speech as part of a broad survey of all the things the Fed does not know about the state of the economy. The most important uncertainty, she said, is “just how far the economy now stands from the attainment of its maximum employment goal.”

She said this unusually murky situation required the Fed to consider a broad range of economic indicators, and to make “difficult judgments” in the absence of clear knowledge. The remarks amounted to a rejection of legislation proposed by House Republicans to require the Fed to make policy according to a firm set of rules.

“Monetary policy ultimately must be conducted in a pragmatic manner that relies not on any particular indicator or model,” Ms. Yellen said.

She also sought to play down the importance of inflation as an indicator. Inflation remains below the 2 percent annual pace sought by the Fed, but Ms. Yellen said this should not be seen as clear evidence that slack remains in labor markets. At the same time, she warned that a rising inflation rate, by itself, would not clearly indicate that the Fed had reached the limits of its stimulus campaign.

“Tightening monetary policy as soon as inflation moves back toward 2 percent might, in this case, prevent labor markets from recovering fully,” she said.

A small group of demonstrators made the trek to the remote resort hotel in the middle of Grand Teton National Park to urge Fed officials to continue the stimulus campaign. They formed a receiving line for policy makers in the lobby outside the conference, dressed in green T-shirts emblazoned: “What Recovery?”

“The Federal Reserve decides how many of us will remain unemployed and whether our wages will go up or stay low,” said Reuben Eckels, the pastor of a church in Wichita, Kan. “They need to hear voices from everyday people.”

The demonstration was organized by the Center for Popular Democracy, a nonprofit advocacy group that has generally focused its campaigns on microeconomic issues like the minimum wage and sick days. Ady Barkan, a lawyer with the group, said it had decided there was a need to focus on the big picture, too.

Mr. Barkan said Ms. Yellen briefly engaged with the demonstrators as she arrived at the conference on Thursday. “She said, ‘We understand the issues you’re talking about and we’re doing everything we can,’ ” he said.

The demonstrators also spent two hours speaking with Ms. George on Thursday and said she told them the Fed needed to pull back soon.