On Friday, Janet Yellen delivered the keynote address at the Kansas City Fed’s Economic Symposium in Jackson Hole.
Many analysts remarked that the speech did not offer many surprises as Yellen discussed the state of the monetary landscape without signaling anything as far as policy moves.
Pantheon Macro’s Ian Shepherdson still found the speech quite revealing.
“Chair Yellen’s Jackson Hole speech laid bare just how little the Fed knows about the labour market,” he wrote in a Sunday note.
Shepherdson described the litany of items that, five years into the recovery, the Fed has still not been able to nail down that would allow it to determine how much “slack,” or underutilized workers, still exists in the labour market.
“They don’t know how much of the drop in labour participation is structural and how much is cyclical,” he says. “They have no way reliably to predict wage or price inflation from the degree of labour market slack. They aren’t even sure whether the labour market needs to tighten further before inflation rises further. And they have no way to know for sure how the economy would respond to a change in policy.”
Shepherdson argues that in the face of such uncertainty the Fed will continue do nothing, even if there is suddenly conclusive proof of a pick-up in the one item the Fed has been most sensitive to, wages.
“In short, the list of labour market questions is rather longer than the list of definitive answers, so, with inflation still well below the Fed’s objective, Dr. Yellen is comfortable for now to watch and wait,” he writes. “The crunch will come when wage gains finally take off, but even then the initial uptick will not trigger any sort of panic. It will take several months of solid gains to convince the FOMC’s doves that policy needs to be adjusted, and, as of now, the hard data have not begun to move. Accordingly, while we are sticking to our view that the first hike will come in March, it is entirely possible that the Fed will be able to wait until June.”
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