Fed Tunes Into Yellen Still Playing Labor-Market Blues

The Federal Reserve’s policy committee has tuned into Chair Janet Yellen’s beat on the U.S. labor market, and it’s still playing the blues.

The Federal Open Market Committee’s policy statement yesterday diminished the unemployment rate as a measure of progress toward its full-employment goal, saying “a range” of indicators suggest “significant underutilization of labor resources.”

That’s a view Yellen has expressed repeatedly since she became chair in February. In her mid-July testimony to House and Senate committees, Yellen’s discussion of labor-market slack turned on broader indicators such the participation rate, rather than the unemployment rate alone.

“The labor-market signals have a bigger policy weight, which is why they don’t expect to tighten maybe for a year,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. Yesterday’s FOMC statement “is putting flesh on things the chair has said before.”

It was also a signal that the committee is wary of raising interest rates too early, even with the unemployment rate forecast by economists to fall below 6 percent this year, inflation moving higher and growth picking up.

The committee added language on significant underutilization to emphasize that “somewhat better data should not be read as an overtly hawkish signal,” said Michael Hanson, U.S. senior economist at Bank of America in New York.

Treasuries fell yesterday after a government report showed the economy expanded 4 percent in the second quarter, faster than forecast, following a 2.1 percent contraction in the prior three months that was smaller than initially estimated.

Treasuries, Stocks

The yield on the 10-year Treasury note climbed 10 basis points, or 0.1 percentage point, to 2.56 percent. The Standard and Poor’s 500 Index rose less than 0.1 percent to 1,970.07.

Policy makers continued to trim the asset purchases that have pumped up the Fed’s balance sheet to a record $4.41 trillion, leaving them on pace to end in October. They tapered monthly bond buying by $10 billion, to $25 billion. The FOMC repeated it’s likely to reduce purchases in “further measured steps” and keep interest rates low for a “considerable time” after ending them.

The panel also upgraded its inflation outlook, saying the risk of price increases running “persistently” below its 2 percent target “has diminished somewhat.” Economists at Goldman Sachs Group Inc. read that shift as a “slightly hawkish tilt,” according to a research note.

The personal consumption expenditures price index, the Fed’s preferred measure, rose 1.8 percent for the 12 months ending May. It has been below the Fed’s 2 percent target for 25 months, rising as little as 0.8 percent in February.

Mixed Signals

The statement’s mixed signals were typical of occasions when the chair has to broker compromises with members, said Vincent Reinhart, chief U.S. economist at Morgan Stanley in New York, who helped write Fed statements when he served as the board’s director of the Division of Monetary Affairs from 2001 to 2007.

Charles Plosser, president of the Fed Bank of Philadelphia, objected to the “considerable time” pledge on rates in the committee’s only dissent.

Richard Fisher of Dallas voted for the statement after calling Fed policy “hyper-accommodative” in a July 16 speech and saying he found himself “increasingly at odds with some of my respected colleagues” over monetary policy. The speech was reproduced in The Wall Street Journal this week.

Yellen spoke about her labor-market “dashboard” in detail at her March press conference, among other venues.

Pre-Recession Levels

Six of her nine gauges linger below pre-recession levels. Among them is the share of the unemployed who have been out of work for 27 weeks or longer, which at 32.8 percent is more than twice the historical average in data back to 1948.

The proportion of working-age people in the labor force, known as the participation rate, is stuck at a 36-year low, and rates of hires and quits are barely halfway to their 2004-2007 averages.

A measure of underemployment, which takes into account discouraged workers and part-timers who want to work a full day, has improved to 12.1 percent while still more than 3 percentage points above its pre-crisis level.

Payrolls gains, on track for their best year since 1999, are a bright spot, along with the pace of layoffs and discharges and a job openings rate.

Five of the indicators will be revised tomorrow with the release of the Labor Department’s July employment report. Four others will be updated on Aug. 12 in the department’s Job Openings and Labor Turnover Survey.

“The broad assessment across those indicators is that there is still evidence of slack in the labor market, and that likely is still placing some restraint on wage growth,” said Laura Rosner, an economist at BNP Paribas SA in New York and a former researcher at the Federal Reserve Bank of New York.

“Continued declines” in the unemployment rate “are not going to force the Fed into a policy decision that isn’t appropriate for the economy.”

Before it's here, it's on the Bloomberg Terminal.