The US Federal Reserve should move cautiously in deciding when to raise interest rates, given that the US labor market remains bruised from the 2007 to 2009 financial crisis, Fed Chair Janet Yellen said on Friday in response to calls from policy hawks for a near-term rate hike.
In a speech at the Fed’s annual policy conference, Yellen laid out in detail why she thinks the unemployment rate alone is inadequate to evaluate the strength of the jobs market and why the central bank needs to move carefully.
Her comments were followed by a speech from European Central Bank (ECB) President Mario Draghi, who said the bank was ready to use all the tools at its disposal to lift inflation in the eurozone if it continued to drop.
He added, however, that most factors that had weighed on prices appeared temporary.
Together, the comments from Yellen and Draghi underscored how both central banks are wrestling with the complexities of labor markets still weakened by the financial crisis.
Yellen stood by her view that significant slack remains in the US economy, even as she nodded to the counter-arguments of some of her colleagues who say labor markets are tighter than she believes and inflation is a risk.
“There is no simple recipe for appropriate policy,” she said, arguing for a “pragmatic” approach.
Ahead of her comments, a number of top Fed officials pressed their case for an early hike in benchmark rates, which the US central bank has held near zero since December 2008.
Federal Reserve Bank of Philadelphia President Charles Plosser, a voting member of the Fed’s policy panel this year, and two non-voters — Federal Reserve Bank of St Louis President James Bullard and Kansas City Federal Reserve Bank President Esther George — all expressed concern about the risk of falling behind the curve.
“I’d rather see us start to raise rates earlier and try to go slow than to wait until the last minute,” Plosser told reporters in an interview in Jackson Hole, Wyoming.
Yellen said the Fed was struggling to determine the degree to which the US labor market was suffering from long-term structural shifts beyond the central bank’s reach, as opposed to more temporary factors that low rates could address.
Given the uncertainty, she said assessments of the labor market “need to become more nuanced.”
Some officials say that the labor market data Yellen often cites give little useful information beyond the unemployment rate and pace of hiring.
Financial market reaction to Yellen’s remarks was muted, with prices for US stocks and most US Treasury securities largely unchanged.
The US dollar, however, moved higher, while the yield on 30-year US Treasury bonds fell.
“Janet Yellen confirmed the majority view of the [Fed’s policy committee] — much more labor recovery is needed before the Fed raises policy rates,” Cumberland Advisors chairman David Kotok said.
Draghi’s remarks, in contrast, marked a rhetorical escalation regarding the ECB’s readiness to take further steps to bolster a eurozone economy that failed to grow in the second quarter and which has seen inflation drop to just 0.4 percent.
The ECB would “use all the available instruments needed to ensure price stability over the medium term,” he said.
He focused on the plight of labor markets, calling for a more cohesive response from policymakers across the single currency bloc to tackle unemployment.
“The way back to higher employment ... is a policy mix that combines monetary, fiscal and structural measures at the union level and at the national level,” Draghi said.
Yellen’s speech included lengthy references to the possibility that the US labor market could be tighter than it seems, and she acknowledged that the Fed might have to raise rates sooner and faster than expected.
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