Federal Reserve Chairwoman Janet Yellen is ready to commit to her belief that the central bank can keep money loose without stoking the kind of inflation that would raise the costs of everything for ordinary Americans.
That is the widely held view of Federal Reserve analysts heading into this week’s monetary policy conference in Jackson Hole, Wyo. — the biggest annual meeting for central bankers to discuss new ideas and the workings of the economy, hosted by the Federal Reserve Bank of Kansas City.
Since taking over as Fed chairwoman in February, Yellen has consistently maintained that the Fed’s quantitative easing and zero short-term interest rate policies are still necessary because of the weakness of the labor market.
In a speech about labor markets in Chicago in March, Yellen explained that “one reason why I believe it is appropriate for the Federal Reserve to continue to provide substantial help to the labor market, without adding to the risks of inflation, is because of the evidence I see that there remains considerable slack in the economy and the labor market.”
The lesson was clear: With the unemployment rate high and millions of Americans forced into part-time work or giving up on the job hunt altogether, the risks of too-high inflation are minimal, relative to the risks of further labor market weakness.
Since that March speech, however, the U.S. has added more than one million jobs and the unemployment rate has fallen half a percentage point to 6.2 percent. Meanwhile, the inflation rate has begun rising toward the Fed’s 2 percent goal, and business economists’ expectations for roughly 3 percent economic growth the rest of the year have firmed.
That has led some analysts to suggest that Yellen might be wise to begin signaling that she will start raising interest rates sooner — currently, market expectations are for the first increases to come next summer.
For example, Federal Reserve Bank of St. Louis President James Bullard, generally thought of as a more “centrist” Federal Reserve System official, told the Wall Street Journal last week that “we’re way ahead of schedule for labor-market improvement.” Bullard recommended setting expectations for earlier rate hikes, saying, “It takes a long time to do this normalization — it’s like turning a supertanker in the ocean … [w]aiting too long might get us into trouble.”
Nevertheless, Yellen is expected to stay the course — effectively placing a bet that over the next year or so it will be better to risk higher inflation than a relapse in the labor market recovery.
“We see little incentive for Yellen to deviate significantly from her past remarks,” Goldman Sachs economists wrote in a preview of the Jackson Hole conference.
Tim Duy, a University of Oregon economics professor, wrote, “Yellen seems content to normalize slowly until she sees the white in the eyes of inflation.”
If she sticks to her story as anticipated, a major likely influence in her thinking will be the past week’s news that the two other largest economies in the world, the euro zone and Japan, are shrinking amid falling inflation. For the near future, Yellen is likely more worried about a similar fate befalling the U.S. than the threat of rising inflation.