Setting the tone.

Yellen Sets Jackson Hole Agenda

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.”
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As Federal Reserve Chair Janet Yellen stepped up to the microphone this morning in Jackson Hole, Wyoming, to deliver her first keynote speech at this annual conference since she succeeded Ben Bernanke, some wondered whether she would offer a policy-oriented speech and adopt an academic tilt to engage an audience consisting mostly of other central bankers and university professors. Some, like me, were also wondering whether Yellen would go further than Bernanke by taking more of a global perspective. It is, after all, a global central bankers' confab.

Yellen didn't disappoint on the first two issues, thus successfully anchoring a gathering centered on "Re-Evaluating Labor Market Dynamics." Her presentation did a great job of framing important analytical issues, setting the tone not only for the subsequent discussions at the conference but also for research that will follow in the weeks and months to come.

Specifically, she described the difficulties confronting an assessment of today's labor market, including the challenges facing an evaluation of the remaining slack in employment. This takes in factors such as the labor participation rate, wage dynamics, involuntary part-time employment and the extent to which the decline in the unemployment rate "somewhat overstates the improvement in overall labor market conditions."

In linking this analytical discussion to the prospects for monetary policy, she reinforced two messages that were signaled in Wednesday's Federal Open Market Committee minutes: first, a less dovish tilt in the general thinking of Fed officials amid a recovery in the labor market, and second, significant differences in officials' thinking when it comes to the details of when and how high to raise interest rates.

Yellen shied away from another issue that is attracting growing attention among economists -- namely, the costs and risks of whether "there is likely to be a price paid in terms of financial stability," as economist Larry Summers recently put it.

Finally, Yellen was silent on the issue of how to navigate the intensifying multispeed policy world of central banking in developed countries. Her main dilemma now is how quickly to ease off the monetary-policy accelerator. This is a stark contrast to the challenge facing European Central Bank President Mario Draghi. He is dealing with the question of when and how to step harder on the accelerator.

With other types of economic stimulus undermined by political polarization and dysfunction, the challenge for central bankers is managing the widening difference in monetary policy and market interest rates (just look at the gap between the 10-year U.S. Treasury note and the comparable-maturity German bund). Much of the burden might be borne by the foreign-exchange markets, potentially restoring an element of volatility that has been contained by central banks. This only adds to concerns about the impact of financial instability on the global economy down the road.

Corrects title of conference agenda in second paragraph.

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Mohamed Aly El-Erian at

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James Greiff at