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Janet Yellen's Reserved Monetary Insight

Samuel Rines

Economics, Domestic Politics, United States

"Instead of providing economists and Wall Street with specific policy plans, Yellen gave economists and Wall Street a lesson on how to acknowledge a lack of clarity in the data."

In her speech at the central bank retreat in Jackson Hole, Federal Reserve Chair Janet Yellen said something remarkable for an economist—the labor market data lacks clarity, is confusing, and is sometimes contradictory. Yellen admitted the Fed is having a difficult time understanding precisely what is happening in the labor markets, and the difficulty of understanding the data has been magnified following the Great Recession. Some variables appear to have lost some of their meaning or ‘predicative power’, while others do not seem to have been affected much at all. This requires a shift in interpreting some data, and not necessarily extrapolating past tendencies and correlations to the present.

In the speech, Yellen subtly argues some data her colleagues are relying on should be interpreted with care. Some may not be relaying the same information about the labor market (and output, and wages and so on) as before the Recession. One to be wary of is the number of people working part-time for economic reasons. Yellen points out that there are “structural”—permanent—forces at work here, such as the shift to a services oriented economy where part-time employment is more common. But there is also a “cyclical”—temporary—component and Fed policy should be effectual here.

The Fed caused itself a problem by stating that monetary policy would be tightened as the unemployment rate dropped and inflation stayed within bounds. This is causing some issues now, as some at the Fed believe the unemployment rate—what the Fed has tied itself to—is not a good measure of the labor market. So Yellen proffered an idea about how to avoid the problems that using a single data point to determine policy could wreak:

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