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Yellen says Fed to be cautious on rates

Friday, August 22 15:59:00

US labour markets remain hampered by the effects of the recession and the Federal Reserve should move cautiously in determining when interest rates should rise, the Fed chief said today.

In a speech at the Jackson Hole central banking conference, Janet Yellen laid out in detail why she feels the unemployment rate alone is inadequate to evaluate the strength of the US jobs market.

The US jobless rate has fallen faster than expected, but Yellen said the economic disruption of the last five years has left millions of workers sidelined, discouraged, or stuck in part time jobs.

She said these facts are not captured in the unemployment rate alone.

Judging whether the economy is close to full employment is "complicated by ongoing shifts in the structure of the labour market and the possibility that the severe recession caused persistent changes in the labour market's functioning," Yellen said in the opening address at the Fed's annual economic policy conference. "

Yellen's speech included lengthy references to the possibility that labour markets may in fact be tighter then they seem, and the Fed may be at risk of having to raise rates sooner and faster than expected.

But overall the remarks marked a defence of her basic premise that the 2007-2009 financial crisis and recession damaged the economy and work force in ways that are not fully understood.

The Fed has held benchmark rates near zero since December 2008, and has said it would wait a "considerable time" after winding down a stimulative bond-buying programme in October before raising them.

Financial markets currently expect rates to raise around the middle of next year.

The debate over Yellen's evaluation of labour markets - and over when to raise borrowing costs - is intensifying within the Fed's policy committee.

Some policymakers, including Kansas City Federal Reserve Bank President Esther George, the host of the annual conference in Jackson Hole, Wyoming, are becoming more vocal in their view that the Fed risks falling behind and should raise rates soon.

At the Fed's last policy meeting in July, some officials argued against characterising the amount of slack in the labour market as "significant," which the Fed did do in its post-meeting statement.

ECB President Mario Draghi is also due to address the conference later this evening. He is coming under pressure to use his last remaining tool - printing money to buy huge amounts of bonds - to tackle near-zero inflation.

For more visit: www.businessworld.ie