The Fed Chairwoman, Yellen eased the financial markets’ concern that the Fed might raise interest rates sooner than expected. She explained how she evaluated the current economic situation, especially quite confusing labor market condition, and she made it clear that economy still is far below natural level of unemployment. Yellen’s comment contributed to rise of the stock prices. The Dow Jones Industrial Average gained 135 points, or 0.8%, to 16458. The S&P 500 index added 15 points, or 0.8%, to 1872.
Wall Street Journal reported five statistics, which Yellen used to explain that the current labor market still has quite a substantial slack. These are existence of large part time worker, low job turnover rate, modest wage growth, increase of long-term unemployment, and lower job market participation rate. These all explain why unemployment rate can be misleading in interpreting labor market condition.
Among those indicators, the most interesting evidence is the decrease of job market participation rate. Job market participation rate decreased from 66% to 63% during the Great Recession and kept decreasing during the recovery process too. So, even though unemployment rate decreased, that’s partly because some people give up searching for jobs any more. Another interesting interpretation is the decreasing job turnover rate. As people fear successfully getting new jobs, they less quit current jobs. This results in decrease of job turnover rate representing bad condition of labor markets.
There are some people even in the Fed, who argue that the Fed should tighten as soon as possible to prevent adverse effects of easy monetary policy. But I think hasty tightening of monetary policy could cause more harm than good. So, as the Fed begin to taper its bond buying program, I somewhat worried that early tightening may hurt economic recovery. But I feel more relieved that Yellen has strong determination to boost the economy further. Once the economy shows signs of being overstimulated, the Fed has enough power to cool down the economy effectively.
One other interesting thing about Yellen’s speech is that she explained the current economic situation by talking about three ordinary Americans, who had struggled to find jobs. She approached this economic problem easy to understand and emotionally. I think this kind of communication is very effective to convey intention of monetary policy to ordinary people with no economics educational background.
Wall Street Journal even described this way of Yellen’s speech as striking, because central bankers tend to use difficult economic jargon, which only can be understood by professional investor or academics. This make ordinary people to difficult understand monetary policy. It is interesting to watch how the first chairwoman lead the monetary policy, and this new communication style seems quite effective and fresh.