Janet Yellen, head of the US Federal Reserve, yesterday moderated her dovish stance on the amount of slack in the US economy, signalling the possibility that interest rates could rise sooner than previously thought.
Speaking at the annual Jackson Hole conference in Wyoming, Ms Yellen noted that labour market conditions in the US economy had improved “more rapidly” than the rate-setting Federal Open Market Committee expected.
“If progress in the labour market continues to be more rapid than anticipated by the committee or if inflation moves up more rapidly than anticipated… then increases in the Federal fund rate target could come sooner than the committee currently expects and could be more rapid thereafter,” she said.
Financial markets are currently expecting the first US rate rise to come in the middle of next year. In response to her speech, the dollar hit its highest level against the euro since last September. “The market seems to perceive this indecision to be a subtle shift away from the ultra-dovish stance that Yellen has taken in the past” said Kathleen Brooks of Forex.com.
However, Ms Yellen – who was giving her first speech to the international conference of central bankers since being appointed chair of the Federal Reserve in January – added that if the American economy disappoints, the path of rate rises will be more accommodating.
“Under-utilisation of labour resources still remains significant,” she argued, pointing to the large number of Americans who still say they are working part time but want longer hours. “The committee will be closely monitoring information on the labour market and inflation in determining the appropriate stance of monetary policy,” she added.
The US unemployment rate has fallen rapidly over the past five years, declining from a peak of 10 per cent in 2009 to 6.2 per cent in July. Net job creation has also improved, with non-farm payrolls rising by 230,000 a month in 2014, up from 190,000 a month in 2012 and 2013.
Analysts were divided over the meaning of Ms Yellen’s speech. “Put simply, she continues to believe there is more slack in the labour market than the unemployment rate suggests,” said Paul Dales of Capital Economics.
But Rob Carnell of ING said Ms Yellen was trying to give a balanced message. “This was classic economist ‘on the one hand’ and ‘on the other’ and gives nothing away. The key theme might be summarised as uncertainty. The Fed typically likes to play safe with monetary policy when it is unsure.”
One Federal Reserve official said yesterday that, in his view, little slack remains in the labour market. The president of the St Louis Federal Reserve, James Bullard, told CNBC he had argued at a Fed policy meeting in July that it should not describe under-utilisation of labour market resources as “significant” and that there was a risk the it could raise rates too slowly over the next few years. “If we go very slow, very gradual, are we going to get another housing bubble and a big disaster on our hands?” he asked.
The median estimate of Open Market Committee policymakers released after their June meeting shows they project the Federal funds rate to rise to 1.13 percent at the end of 2015 and to 2.5 percent a year later.