How Janet Yellen Is Looking at the Economy

The new Fed chair pledged continuity with her predecessor at her first press conference.

Federal Reserve Board Chair Janet Yellen arrives at a news conference March 19, 2014 at the Federal Reserve Board in Washington, DC.
National Journal
Catherine Hollander
March 19, 2014, 2:11 p.m.

Don’t look for day­light between Janet Yel­len and her pre­de­cessor Ben Bernanke, the new Fed­er­al Re­serve Board chair said Wed­nes­day.

“I think we are com­mit­ted to ex­actly the same set of goals,” Yel­len told re­port­ers at a press con­fer­ence fol­low­ing the Fed’s latest policy an­nounce­ment. “I think he had a very good agenda and it’s one I shared. It’s why I came to Wash­ing­ton to be vice chair and it’s the agenda I ex­pect to con­tin­ue pur­su­ing,” she said. Wed­nes­day was the first meet­ing and press con­fer­ence with Yel­len as the cent­ral bank’s chair.

Still, Yel­len is chart­ing a fresh course for the cent­ral bank. It’s not one that Bernanke wouldn’t have taken, ne­ces­sar­ily, but Yel­len faces dif­fer­ent chal­lenges as she over­sees the un­wind­ing of the Fed’s crisis-era bal­ance sheet and the even­tu­al rais­ing of in­terest rates. The Bernanke Fed said in Decem­ber 2012 that it would keep in­terest rates low at least un­til the un­em­ploy­ment rate reached 6.5 per­cent, so long as in­fla­tion wasn’t stray­ing too far from its long-run 2 per­cent tar­get. (At the time the an­nounce­ment was made, un­em­ploy­ment was 7.9 per­cent.) On Wed­nes­day, with un­em­ploy­ment close to that threshold at 6.7 per­cent, the Fed scrapped that guid­ance al­to­geth­er and pledged to look at a “wide range of in­form­a­tion” when de­cid­ing to raise its bench­mark in­terest rate, known as the fed­er­al funds rate.

“In de­term­in­ing how long to main­tain the cur­rent 0 to 1/4 per­cent tar­get range for the fed­er­al funds rate, the Com­mit­tee will as­sess pro­gress — both real­ized and ex­pec­ted — to­ward its ob­ject­ives of max­im­um em­ploy­ment and 2 per­cent in­fla­tion,” the Fed’s policy-set­ting group, the Fed­er­al Open Mar­ket Com­mit­tee, said in a state­ment fol­low­ing a two-day meet­ing. “This as­sess­ment will take in­to ac­count a wide range of in­form­a­tion, in­clud­ing meas­ures of labor mar­ket con­di­tions, in­dic­at­ors of in­fla­tion pres­sures and in­fla­tion ex­pect­a­tions, and read­ings on fin­an­cial de­vel­op­ments.”

Yel­len out­lined at the press con­fer­ence which labor-mar­ket con­di­tions she’d be look­ing at most closely. She will be watch­ing:

  • The stand­ard un­em­ploy­ment rate (i.e. the 6.7 per­cent U.S. un­em­ploy­ment rate).

  • The U-6 rate, a broad­er meas­ure of un­em­ploy­ment that in­cludes “mar­gin­ally at­tached” work­ers.

  • The num­ber of in­di­vidu­als work­ing part-time on an in­vol­un­tary basis.

  • The num­ber of “dis­cour­aged” and “mar­gin­ally at­tached” work­ers.

  • The share of the labor force that has been un­em­ployed for 27 weeks or more, aka the long-term un­em­ployed.

  • The labor-force par­ti­cip­a­tion rate, which meas­ures the per­cent of the pop­u­la­tion that is part of the labor force, work­ing or look­ing for work. This has fallen dra­mat­ic­ally in re­cent years, partly due to the aging of the pop­u­la­tion, but also partly due to the re­ces­sion. How much of the de­cline is due to the former and how much is due to the lat­ter is the sub­ject of de­bate among eco­nom­ists today.

  • The rate at which people are quit­ting their jobs (a sign of a healthy labor mar­ket), the num­ber of job open­ings, and the rate at which work­ers are get­ting hired to new jobs.

“If you ask about my dash­board, the dial on vir­tu­ally all of those things is mov­ing in a dir­ec­tion of im­prove­ment,” Yel­len said.

Yel­len also said the cent­ral bank was likely to raise in­terest rates around six months after the Fed ended a sep­ar­ate bond-buy­ing pro­gram known as quant­it­at­ive eas­ing, or QE, which is aimed at bring­ing down longer-term in­terest rates. QE will now con­sist of $55 bil­lion of Treas­ury bonds and mort­gage-backed se­cur­it­ies after see­ing its third $10 bil­lion cut since Decem­ber in this policy state­ment, the Fed said Wed­nes­day.

Thir­teen of the Fed’s 16 poli­cy­makers be­lieve the cent­ral bank is likely to start rais­ing the fed­er­al funds rate in 2015, the Fed had said in a sep­ar­ate state­ment fol­low­ing the meet­ing. Still, mar­kets fell after Yel­len de­scribed the six-month win­dow, which would likely put the tim­ing of a rate hike some­where around next spring or sum­mer.

The Fed’s poli­cy­makers will next meet April 29-30.

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