Janet Yellen faces questions over jobs data

Feb 10, 2014

Economists will be looking for Federal Reserve chairman Janet Yellen to explain worrying trends in the labour market when she testifies before the House Financial Services Committee on ­Tuesday in her first major comments since her nomination.

Ms Yellen’s comments will come days after United States employment data fell short of expectations for the second straight month, posing ­questions over how the Fed will proceed with the withdrawal of monetary ­stimulus if the weakness in jobs ­creation continues. The world’s biggest ­economy created 113,000 jobs in ­January, it was revealed on Friday, up from 75,000 in December but short of the 274,000 recorded for November.

Westpac economist Elliot Clarke said there was no doubt the market was looking for Ms Yellen to affirm her ­reputation as a policy dove who is sympathetic to low interest rates, but those hopes may be dashed. “The equity ­market and financial markets more broadly will probably hope to hear a more dovish line of thought emphasising concern about the labour market.

“I don’t think they’ll get it.”

There are signs investors have fallen back into a perverse pattern of optimism in the face of poor ­economic data. On Friday, after payrolls missed expectations, Wall Street rallied in the belief that economic ­weakness would sustain the Fed’s stimulus program.

Although the Fed confirmed in December that it would taper quantitative easing, and reduced bond purchases in January, it is still pumping ­$US65 billion ($73 billion) a month into markets to keep rates low and stimulate the ­economy.

Mr Clarke highlighted that the tone of commentary from other members of the Fed has shown the central bank is looking firmly to the end of QE.

“What we’ve seen from the FOMC’s commentary from other Fed members is they are quite determined to continue on,” he said. “They’ve chosen to act.”

Earlier this month, Dennis Lockhart, who is the president of the Atlanta Fed, said the unemployment rate is “not a perfect indicator of the broad health of the labour markets” in comments reported at the time, and that he sees low rates for longer.

Charles Plosser, president of the ­Philadelphia branch, advocated for a speedy wind-down of QE “to reflect the strengthening economy”.

Ms Yellen is known for her work on the labour market, which has helped establish her dovish credentials in ­contrast to some of her predecessors who forged their reputations focusing on inflation, for example.“I would hope to see a discussion around what part of the participation rate has been due to the aging population and what part has been more cyclical,” Mr Clarke said. “Yellen has always talked much more about the labour market and she has raised concerns a number of times about the weakness being cyclical.”

Mr Clarke is hopeful Yellen will talk about the nuances of employment trends and her views on the decline in the participation rate. The US unemployment rate is at the lowest level since before the financial crisis at 6.6 per cent but a lot of that has been driven by Americans dropping out of the workforce, undermining the headline figure and creating a policy headache for the Fed.

Source: FINANCIAL REVIEW