Janet Yellen delivered her first keynote address at the annual conference of central bankers in Jackson Hole, Wyoming.
This year’s gathering is focused on “Re-Evaluating Labor Market Dynamics.” 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 delivered at Wednesday’s Federal Open Market Committee: A less dovish tilt in the general thinking of Fed officials amid a recovery in the labor market, and 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.
