NEW YORK TIMES • Janet Yellen Speech Indicates Fed Will Rethink Interest-Rate Plans

Monday, June 6, 2016

Originally Published in the New York Times

Janet Yellen Speech Indicates Fed Will Rethink Interest-Rate Plans

PHILADELPHIA — The Federal Reserve, mindful of unexpectedly weak job growth last month, has abandoned hope of raising interest rates at its next meeting in June, but Fed officials say they are still thinking seriously about raising rates in July or September.

Janet L. Yellen, the Fed’s chairwoman, said a few weeks ago that she expected the Fed to raise its benchmark interest rate “in the coming months,” but she omitted those words from a Monday speech, indicatingthe reported weakness of job creation in May has caused the Fed to rethink its plans.

Still, Ms. Yellen delivered a generally upbeat assessment of economic conditions. While describing the May jobs report as “concerning,” she also emphasized that it was just one piece of data and that other economic indicators, including wage growth, paint a considerably brighter picture.

“I see good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones,” she told the World Affairs Council of Philadelphia.

Investors have all but written off the chances the Fed will increase rates at its next meeting on June 14 and 15, and Ms. Yellen did not try to change their minds. Her speech was the last public appearance by a Fed official before the meeting.

But she added that she still expected economic growth — and she still expected rate increases.

“If incoming data are consistent with labor market conditions strengthening and inflation making progress toward our 2 percent objective, as I expect, further gradual increases in the federal funds rate are likely to be appropriate,” she said.

Some Fed officials have delivered a similar message since the May report.

Loretta Mester, president of the Federal Reserve Bank of Cleveland, has sounded relatively confident in recent months, indicating that the economy was ready for a rate increase. In Stockholm on Saturday, she said that the May jobs report, while disappointing, had not changed her overall economic assessment.

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Others have emphasized that there is no reason to rush, suggesting that the Fed should wait for stronger data before moving to raise rates.

“There would appear to be an advantage to waiting until developments provide greater confidence,” Lael Brainard, a Fed governor, said in a speech on Friday. In her judgment, Ms. Brainard said, the risks of moving too soon significantly exceeded the dangers of waiting a little too long.

Daniel Tarullo, a Fed governor who shares Ms. Brainard’s caution, said on Thursday in an interview with Bloomberg that he was still looking for “an affirmative reason to move.”

The government estimated last week that the economy added 38,000 jobs in May, well below market expectations and the pace of hiring so far this year.

The Fed entered the year predicting quarterly rate increases, only to back away from a first increase in March when the economy showed unexpected signs of weakness. Fed officials in recent weeks insisted they were thinking about raising rates in June. Now it seems that too has passed.

Ms. Yellen did not offer a new plan, and that was intentional.

“I know market participants really want to know exactly what’s going to happen,” she said at one point. “There is, as I said about 18 times, no preset plan.”

She devoted much of her speech to the economic uncertainties confronting the Fed. Among them, she numbered the inconsistency of recent economic data and Britain’s coming referendum on whether to remain in the European Union. She said a breakup would be economically disruptive.

“The uncertainties are sizable, and progress toward our goals and, by implication, the appropriate stance of monetary policy will depend on how these uncertainties evolve,” she said.

But reasons for optimism were also on display Monday.

After her speech, Ms. Yellen met with workers at a job-training program in West Philadelphia. During her first year as Fed chairwoman, round tables with workers in Chicago and Chelsea, Mass., brought together many attendees who were struggling to find jobs. The tone of Monday’s round table was notably more upbeat — the seven people who met with Ms. Yellen all had jobs or, if they were in training programs, were optimistic about finding steady work.

Mark Gay spent nearly two years looking for full-time work before he found a job with a landscaping business run by the University City District, the nonprofit group that hosted the meeting. Asked whether life was improving for people in his West Philadelphia neighborhood, he paused before answering.

“I would have to agree,” he said. “Yes, a lot of people in my community have gained employment since 2012.”

Sarah Davis, director of development for University City District, says its jobs-training program has about 110 graduates a year. She said the percentage of those finding jobs has climbed steadily over the last five years to about 95 percent, and demand from potential employers now exceeds the supply of workers the program can offer. “We’re getting daily calls from potential employer partners,” Ms. Davis said.

Yet Ms. Yellen noted in her speech that unemployment remained widespread among minorities and lesser-educated people. There were also signs the labor market is no longer healing as quickly. The economy has added 125,000 jobs per month this year, compared with a monthly average of 229,000 last year.

The Fed’s in-house labor market conditions index, devised to summarize a wide range of labor market data, has declined each month since the Fed raised interest rates in December.

“The Fed’s current course is driven not by the state of the economy, but by a desire to get interest rates and its balance sheet back to what is considered normal,” Narayana Kocherlakota, the former president of the Federal Reserve Bank of Minneapolis, wrote in a Bloomberg opinion piece last week criticizing the Fed’s desire to raise rates.

Ms. Yellen responded indirectly to that critique during a question-and-answer session after her speech on Monday. She said the Fed was focused on its mandates of maximizing employment and stabilizing inflation. Raising rates was not an end but a means, she said.

She noted that the economy should benefit from a virtuous loop of increased employment and rising incomes. “If the May labor report was an aberration or reflects a temporary slowdown resulting from the weakness in economic activity at the start of the year, then job growth should pick up and support further gains in income,” Ms. Yellen said.

On the other hand, she noted, “the less favorable possibility” was that a slowdown in corporate investment had translated into a slowdown in job growth. How long will it take to tell the difference? On Monday, Ms. Yellen wasn’t offering any predictions. “My colleagues and I will be wrestling with these and other related questions going forward,” she said.