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 else”.
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 economists.
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 seven 'mights'.
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 productively.
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 of possibilities?
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 competing ones.
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 speech.
We will probably get a rate hike, probably in 2015, but much has to happen first before the goddess can retract her many extra hands.
(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 firstname.lastname@example.org and find more columns at blogs.reuters.com/james-saft)
(Editing by James Dalgleish)