Global Outlook Just how long, in Fed speak, is “a considerable time?” That was the all-important issue as the US Federal Reserve’s chairwoman, Janet Yellen, gave the now-traditional keynote speech yesterday at Jackson Hole, Wyoming – surely the most agreeable moment on the calendar of central bankers.
Mostly, they convene at the headquarters of the Bank for International Settlements, in the rather less uplifting setting of the Centralbahnplatz in Basle, opposite the Swiss city’s main railway station. Jackson Hole is deep in the heart of cowboy country, in the shadow of the magnificent Grand Teton mountains – a treat for which they can thank Paul Volcker, the Fed chairman between 1979 and 1987.
In those days the annual summer symposium hosted by the Kansas City Federal Reserve was a bit of a bust. Anxious to attract the fed chief, in 1982 the organisers shifted the event to Jackson Hole, noted for its splendid trout fly fishing, a cherished hobby of Mr Volcker. The rest is history. Today the 140-odd invitations to the gathering, composed of central bankers and other economic luminaries, could not be more fiercely coveted.
This year, though, the fishing, the walks and the barbecues will be subordinate to the search for clues on the burning issue of the hour: when will the Fed start raising interest rates?
For months, the central bank’s mantra has been, “not for a considerable time.” Ms Yellen, in the job since February, has thus far held close to the dovish line of her predecessor, Ben Bernanke. Despite the growing strength of the US economy, the recovery is still fragile, she insists. Quantitative easing – the bond purchases that have boosted the Fed’s balance sheet to well over $4 trillion – will end on schedule in October. So far, no problem. But what about an increase in the benchmark federal funds rate – at a record low, virtually zero, since 2008?
Hitherto, the prevailing wisdom – which Ms Yellen has done nothing to discourage – is that the Fed will start nudging the rate higher in the middle of 2015. But the latest indicators have some suspecting that the timetable could be brought forward.
Whisper it not to devotees of the dismal science, but the US economy right now is in something of a sweet spot. Second-quarter growth hit 4 per cent, while inflation is creeping up to the Fed’s 2 per cent target level. Unemployment, meanwhile, is down to 6.2 per cent as the economy generates a steady 200,000-plus new jobs per month.
All this has led some top Fed officials to urge an earlier start to tightening, as shown by the minutes of July’s session of the policymaking Open Market Committee. The hawks are still a minority, but their ranks are growing. “Some participants,” the minutes noted, “viewed the actual and expected progress... as sufficient to call for a relatively prompt move towards reducing policy accommodation.” In plain English, that would mean a first hike in the Fed funds rate in the spring, or conceivably even sooner. Nor has the prospect spooked markets, where the Dow has added 600-odd points in the last fortnight.
Now all eyes are on Ms Yellen. Significantly, her address yesterday, entitled simply “Labour Markets”, focused on what the Fed calls persisting “significant slack” in that area – evident in the snail-like growth in hourly wages, a proliferation in part-time work, and little if any decline in the total for the long-term unemployed. Indeed, the fall in the headline jobless rate reflects not just an improving economy, but the number of working-age people who have simply giving up looking for employment.
Since she took office, Ms Yellen has vowed to be a champion of Main Street, not Wall Street, with the creation of decent jobs at the heart of this concern. That argues for a later start to tightening, and even then increases will be small and heavily telegraphed in advance. Essentially, though, America’s current interest rate debate is born of success, not failure.