(James Saft is a Reuters columnist. The opinions expressed are
By James Saft
Aug 22 Harry Truman once made a plea for a
one-armed economist, being sick and tired of his advisors always
saying "on the one hand this, but on the other hand something
Federal Reserve Chair Janet Yellen in her speech at Jackson
Hole on Friday was like something out of old Harry's nightmares,
offering up so many alternative explanations for the state of
the economy that she seemed like a many-handed Indian goddess of
One way to look at it would be to see the speech as a
justifiable acknowledgement that the world, and specifically
today's economy, is far too complex and opaque to be boiled down
to simple alternatives of 'hawkish' or 'dovish'.
Another, and this is not in conflict with the above, is that
nothing big is going to happen until we see the future more
clearly, which, given the speech, may not be any time soon. That
stacks up well with expectations that we won't soon see rates
rising, but will soon have an amplifying debate within the Fed
about why not.
Make no mistake, this was a temporizing speech. As Ian
Shepherdson of Pantheon Macroeconomics noted, Yellen's word
count included 21 'coulds', 20 'buts', 11 'woulds', 13 'ifs' and
The key quote, below, was itself a sort of masterpiece of
uncertainty and non-commitment:
"Assessments of the degree of remaining slack in the labor
market need to become more nuanced because of considerable
uncertainty about the level of employment consistent with the
Federal Reserve's dual mandate."
Yellen dealt out this uncertainty with multiple hands:
On one hand, the unemployment rate is falling.
On the other, workers are stuck in part-time jobs, or out of
the workforce or just discouraged.
On yet another hand, changes in the structure of the labor
market may have been a result of the severe recession.
On still another, wages have been flat and growing less than
Bringing us to (by my count) the fifth hand, which is that
this may be due to "pent-up wage deflation".
That's even before we find hands for demographic issues or
the impact on wages of the low-skilled, long-term unemployed.
All of this paints a less than clear picture, but one in
which we are likely to have to wait for a move off of the zero
lower bound of interest rates until matters clarify themselves.
One easy conclusion from the speech is that Yellen is
forcefully rejecting calls, notably from Stanford economist John
Taylor, for legislation which would tie the Fed's hands, forcing
it to choose an indicator, like money supply, and then define in
advance how it will set policy based on its movements.
How could you possibly set a rule to cover the current mix
Take, for example, this relatively new idea of pent-up wage
deflation, which is a lingering effect of the difficulty of
cutting nominal wages during a downturn. Because this limited
the fall in wages, companies are under less pressure than you'd
otherwise expect to raise them once a recovery begins. You might
then see a slow rise in wages be followed by something more
rapid. Theoretically that makes it harder for policy-makers to
get good signals from wages now that they are rising slowly, and
once they begin to accelerate. It might form the basis of an
argument for letting wages do a bit of catch-up before you react
by raising rates.
An interesting possibility, but balanced by several
On the whole, markets took the speech as being slightly
hawkish, as Yellen appeared to be more willing to discuss
multiple sides of the argument. Yes, she is open to being shown
that rates need to rise sooner than perhaps now expected, but
that is different than expecting that to happen.
That's a fundamentally honest position, but one which is
hard for markets to price.
In the absence of new data, or statements from Yellen, I'd
expect expectations to stay close to where they were before the
We will probably get a rate hike, probably in 2015, but much
has to happen first before the goddess can retract her many
(At the time of publication James Saft did not own any direct
investments in securities mentioned in this article. He may be
an owner indirectly as an investor in a fund. You can email him
at email@example.com and find more columns at blogs.reuters.com/james-saft)
(Editing by James Dalgleish)