Yellen facing hard call on when labor market has healed

yellen
Federal Reserve Chairwoman Janet Yellen

Federal Reserve Chairwoman Janet Yellen said she still isn't satisfied with the U.S. labor market. Deciding when she is won't be easy.

“The labor market has yet to fully recover,” Ms. Yellen said Friday in a speech at the Kansas City Fed's annual conference in Jackson Hole, Wyo. While the five-year expansion has put more Americans back to work, “a key challenge is to assess just how far the economy now stands from attainment of its maximum employment goal.”

Her comments echoed the message from minutes of the July Federal Open Market Committee meeting, which showed officials growing more aware that labor markets are returning to health. She said policy makers will have to look at a “wide range” of indicators to make that assessment, adding that there's “no simple recipe” for deciding when to raise interest rates for the first time since 2006.

Ms. Yellen also emphasized the need for flexibility: If progress “continues to be more rapid than anticipated,” an interest rate increase could come sooner than currently expected and further increases could be more rapid, she said. Conversely, if the Fed's goals of full employment and stable prices remain elusive, policy would be more accommodative.

“It is a more balanced assessment than she has given in recent quarters,” said Michael Gapen, senior U.S. economist at Barclays Capital and a former member of the Fed Board staff. One takeaway: the closer the committee gets to full employment, the more difficult it is to “give concrete guidance” on the outlook for interest rates, Mr. Gapen said.

Ms. Yellen acknowledged that challenge, saying that officials are “particularly attentive to the need to clearly describe the policy framework we are using.”

In her remarks, Ms. Yellen repeated the FOMC statement that “underutilization of labor resources still remains significant.” Much of her 16-page speech walked through measures of labor market “slack” that Ms. Yellen uses — such as the number of people employed part-time who prefer full-time work — and how much of that slack might be related to weak demand as opposed to longer-term trends.