US Job market slack remains, says Yellen

Despite unemployment coming down to 6.2%, US job market slack still remains, said Janet Yellen, chair of the US Federal Reserve.

In her opening remarks on Friday at the Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyoming, Ms. Yellen said the US had created more jobs during the economic recovery than were lost during the downturn caused by the financial crisis and Great Recession that followed.

Job gains this year have averaged 230,000 per month, compared to 190,000 a month in 2012/2013.

Unemployment at 6.2% today is almost four percentage points below its 2009 peak. Over the past twelve months, the unemployment rate has dropped significantly, “and at a surprisingly rapid pace,” Mr. Yellen explained.

Labor market not yet fully recovered

However, she added that five years after the end of the recession, the labor market has not yet fully recovered.

Ms. Yellen added that as the economic rebound progresses, assessment of the degree of remaining slack in the labor market has to become more “nuanced because of considerable uncertainty about the level of employment consistent with the Federal Reserve’s dual mandate.”

If inflation were to start rising faster than expected, Ms. Yellen said the federal funds rate target could be brought forward and might be “more rapid thereafter.”

If economic performance took a downturn and progress towards the Fed’s goals proceeded more slowly than expected, “then the future path of interest rates likely would be more accommodative than we currently anticipate.”

US and Eurozone unemployment

While the US experienced a steep and immediate unemployment rise in the aftermath of the Great Recession, the Eurozone went through two increases linked to two sequential recessions, says Mr. Draghi (Source: ECB).

Monetary policy not preset

Ms. Yellen stressed that monetary policy in not a preset path. She said the Committee will be watching incoming data regarding inflation and the labor market closely in determining the most suitable monetary approach.

From across the pond, the BBC quoted Luke Bartholomew, manager at Aberdeen Asset Management Investment, who said Ms. Yellen is being “deliberately vague” by saying “(there is) nothing to see.”

Mr. Bartholomew added “Unfortunately that’s just making markets more desperate for answers. Her strategy is probably to deliberately underwhelm. She’s saying the Fed might raise rates soon but then again might not. That kind of vagueness suits her because it leaves options open.”

Most economists wonder how many long-term unemployed people (jobless for more than 27 weeks) in the US will ever come back into the labor market. Several studies have suggested that very few will.

Pros & cons of low interest rates

The aim of low interest rates is to encourage borrowing, investment and spending.

A growing number of economists are concerned that central banks, with their current historically-low interest rates, are fanning the fires of another financial bubble or future inflation.

Central bankers are torn between stoking bubbles and abandoning efforts to prevent another economic downturn – the world’s major economies’ recoveries are still very fragile.

The Eurozone reported zero GDP growth during the second quarter. European Central Bank (ECB) President Mario Draghi emphasized that Europe’s central bankers and lawmakers have a role to play in lifting demand and lowering unemployment.

Mr. Draghi said in Wyoming yesterday:

“It would be helpful for the overall stance of policy if fiscal policy could play a greater role alongside monetary policy.”

Mr. Draghi’s words represent a dramatic shift from previously telling ECB officials that European governments needed to reduce deficits and introduce economic reforms, even when their economies were underperforming.

In order to resolve the persistently high unemployment rates in several European countries, Mr. Draghi insists, however, that reforms are crucial.

Mr. Draghi said:

“No amount of fiscal or monetary accommodation, however, can compensate for the necessary structural reforms in the euro area. As I said, **structural unemployment was already estimated to be very high coming into the crisis (around 9%). Indeed, some research suggests it has been high since the 1970s. There are important reasons why national structural reforms that tackle this problem can no longer be delayed.”

** Structural unemployment refers to unemployment that is not related to a decline in demand. When there is structural unemployment, a basic structure within the economy is responsible. For example, automation results in the laying off of unskilled workers. Those unskilled workers have difficulties finding new jobs in their industry, because employers are seeking people with specific skills, such as operating robots, which they do not have. So, the job vacancies remain vacant and the unemployed people remain unemployed.

Video – Yellen remains non-committal

Adam Johnson at Bloomberg’s “Money Clip” reports on the central bank gathering at Jackson Hole, Wyoming.

Leave A Reply

Your email address will not be published.