WASHINGTON (AP) — Janet Yellen has won credit for guiding the Federal Reserve’s first six months of transition from the Ben Bernanke era. Bernanke’s Fed had steered the U.S. economy through a grave crisis by slashing interest rates and restoring confidence in banks. Yellen has so far carried on his approach with barely a hiccup.
She may one day recall her first six months as a too-brief honeymoon.
Or, conversely, will it wait too long to raise rates, causing the economy to overheat and inflation to surge?
No one knows. Which helps explain the anticipation surrounding Yellen’s speech Friday at the economic conference sponsored every August in Jackson Hole, Wyoming, by the Federal Reserve Bank of Kansas City. Given that this year’s topic is labor markets, Yellen is sure to lay out her assessment of the U.S. job market.
Whatever she says - or, perhaps, doesn’t say - will shape perceptions of when and how aggressively the Fed will raise rates.
Yellen has frequently characterized the job market as weaker than the unemployment rate suggests. She’s noted, for example, that the jobless rate, now a nearly normal 6.2 percent, belies other unhealthy trends: Weak pay growth, a sizable number of part-timers who want full-time work and high proportions of people who’ve been looking for a job for more than six months or have stopped looking.
Might Yellen describe those trends as chronic problems that still require the Fed’s help? Or rather as temporary drags that will fade as the economy improves? Investors will look for any signal of a coming rate hike because it would mean higher rates on business and consumer loans and could depress stock prices.
At Jackson Hole, Bernanke would sometimes use his speeches to telegraph actions the Fed was considering. Yellen could take the same opportunity to shed light on the Fed’s plans for withdrawing the extraordinary economic support it’s provided since 2008.
“The road ahead will get much tougher for Yellen when she starts outlining the Fed’s exit strategy,” said David Jones, chief economist at DMJ Advisors and the author of a book on the Fed’s first century. “Any change could be accompanied by significant market instability.”
This year, the Fed has been paring its monthly bond purchases, which have been intended to keep long-term rates low. Yellen has stressed that even after the purchases end this fall, the Fed will keep rates low and maintain its vast investment portfolio to keep downward pressure on rates.
The impending end of the bond purchases - a step investors once anticipated with dread - is being taken in stride. The market has remained calm, and stocks are up this year, suggesting that Yellen’s reassurances have had an effect.
That said, her first six months haven’t been without stumbles. Consider her first news conference. Responding to a question, Yellen said that when the Fed stated it would keep its benchmark rate ultra-low for a “considerable time” after its bond purchases ended, that phrase meant around six months.
Stocks sank on fears that rate increases could start sooner than expected.
Asked about her six-month comment at her next news conference, Yellen de-coupled the phrase “considerable time” from any specific period.