Fed Chair Janet Yellen isn’t just the Fairy Godmother of the Bull Market. She is also the Fairy Godmother of the Labor Market. In her 3/5/14 ceremonial swearing-in speech
, she said: “Too many Americans still can’t find a job or are forced to work part-time. The goals set by Congress for the Federal Reserve are clear: maximum employment and stable prices. It is equally clear that the economy continues to operate considerably short of these objectives. I promise to do all that I can, working with my fellow policymakers, to achieve the very important goals Congress has assigned to the Federal Reserve.”
On 3/12/14, I wrote: “Fed Chair Janet Yellen is a card-carrying Keynesian. Members of this club have been frustrated that ultra-easy monetary policy hasn’t boosted aggregate economic demand sufficiently to close the output gap and boost inflation. While lots of stimulus was provided by the American Recovery and Reinvestment Act during 2009 and 2010, they bemoan that there has been too much fiscal drag since then. They conclude that ultra-easy monetary policy must be maintained for as long as necessary to close the gap.”
In her first press conference
(3/19/14) as Fed chair, Yellen talked about her “dashboard” of key labor market indicators including the headline U-3 and broader U-6 unemployment rates. Also on the dashboard are the numbers of discouraged and marginally employed workers, as well as the share of the long-term unemployed. She said she saw progress in the labor market, but she also saw too much distress. She also mentioned the labor force participation rate, which might be falling for demographic reasons but still has a cyclical component, in her opinion. She has also been watching quit rates, job openings, and the hiring rate, which was still too low, in her opinion back then.
Most importantly, Yellen said that wage inflation should be running around 3%-4% given the increase in productivity. She noted that other than a small spike in one measure, wage inflation remained too low around 2%: “The final thing I’ve mentioned is wages and wage growth has really been very low. I know there is perhaps one isolated measure of wage growth that suggests some uptick, but most measures of wage increase are running at very low levels. In fact, with the productivity growth we have, and 2% inflation, one would probably expect to see, on an ongoing basis, something between perhaps 3% and 4% wage inflation; [that] would be normal. Wage inflation has been running at 2%. So not only is it depressed, signaling weakness in the labor market, but it is certainly not flashing an increase … and it might signal some tightening or meaningful pressures on inflation, at least over time. And I would say we’re not seeing that.”
Yellen suggested that the wage numbers indicated that there was too much slack in the labor market. In a 3/31/14 speech
, she specified that she is watching hourly compensation in the Employment Cost Index and average hourly earnings for all employees in private industries. In a footnote, she observed that they’ve been increasing “no more than 2-1/4%.” In her press conference, she said they should be growing 3%-4%.
Dr. Ed Yardeni
is the President of Yardeni Research, Inc., a provider of independent global investment strategy research. To read more of his blogs, CLICK HERE NOW.
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