BOSTON (MNI) – The following are the remarks of Federal Reserve
Vice Chair Janet Yellen prepared Wednesday for the Boston Economic Club:
Good evening. Ifm honored to have the opportunity to address the
Boston Economic Club and Ifm grateful to Chip Case for inviting me to
speak to you tonight. As most of you probably know, Chip was one of the
first economists to document worrisome signs of a housing bubble in
parts of the United States. After sounding an early alarm in 2003, Chip
watched the bubble grow and was prescient in anticipating the very
serious toll that its unwinding would impose on the economy. Chip
recognized that declining house prices would affect not just residential
construction but also consumer spending, the ability of households to
borrow, and the health of the financial system. In light of these
pervasive linkages, the repeat sales house price index that bears
Chipfs name is one of the most closely watched of all U.S. economic
indicators. Indeed, as I will discuss this evening, prolonged weakness
in the housing sector remains one of several serious headwinds facing
the U.S. economy. Given these headwinds, I believe that a highly
accommodative monetary policy will be needed for quite some time to help
the economy mend. Before continuing, let me emphasize that my remarks
reflect my own views and not necessarily those of others in the Federal
Reserve System.
Economic Conditions and the Outlook
In my remarks tonight, I will describe my perspective on monetary
policy. To begin, however, Ifll highlight some of the current
conditions and key features of the economic outlook that shape my views.
To anticipate the main points, the economy appears to be expanding at a
moderate pace. The unemployment rate is almost 1 percentage point lower
than it was a year ago, but we are still far from full employment.
Looking ahead, I anticipate that significant headwinds will continue to
restrain the pace of the recovery so that the remaining employment gap
is likely to close only slowly. At the same time, inflation (abstracting
from the transitory effects of movements in oil prices) has been running
near 2 percent over the past two years, and I expect it to remain at or
below the Federal Open Market Committeefs (the FOMCfs) 2 percent
objective for the foreseeable future. As always, considerable
uncertainty attends the outlook for both growth and inflation; events
could prove either more positive or negative than what I see as the most
likely outcome. That said, as I will explain, I consider the balance of
risks to be tilted toward a weaker economy.
Starting with the labor market, conditions have gradually improved
over the past year, albeit at an uneven pace. Average monthly payroll
gains picked up from about 145,000 in the second half of 2011 to 225,000
during the first quarter of this year. However, these gains fell back to
around 75,000 a month in April and May. The deceleration of payroll
employment from the first to the second quarter was probably exacerbated
by some combination of seasonal adjustment difficulties and an unusually
mild winter that likely boosted employment growth earlier in the year.
Payback for that earlier strength probably accounts for some of the
weakness wefve seen recently. Smoothing through these fluctuations, the
average pace of job creation for the year to date, as well as recent
unemployment benefit claims data and other indicators, appear to be
consistent with an economy expanding at only a moderate rate, close to
its potential.
Such modest growth would imply little additional progress in the
near term in improving labor market conditions, which remain very weak.
Currently, the unemployment rate stands around 3 percentage points above
where it was at the onset of the recession — a figure that is stark
enough as it is, but does not even take account of the millions more who
have left the labor force or who would have joined under more normal
circumstances in the past four years. All told, only about half of the
collapse in private payroll employment in 2008 and 2009 has been
reversed. A critical question for monetary policy is the extent to which
these numbers reflect a shortfall from full employment versus a rise in
structural unemployment. While the magnitude of structural unemployment
is uncertain, I read the evidence as suggesting that the bulk of the
rise during the recession was cyclical, not structural in nature.
Consider figure 1, which presents three indicators of labor market
slack. The black solid line is the unemployment gap, defined as the
difference between the actual unemployment rate and the Congressional
Budget Office (CBO) estimate of the rate consistent with inflation
remaining stable over time. The red dashed line is an index of the
difficulty households perceive in finding jobs, based on results from a
survey conducted by the Conference Board. And the red dotted line is an
index of firmsf ability to fill jobs, based on a survey conducted by
the National Federation of Independent Business. All three measures show
similar cyclical movements over the past 20 years, and all now stand at
very high levels. This similarity runs counter to claims that the CBOfs
and other estimates of the unemployment gap overstate the true amount of
slack by placing insufficient weight on structural explanations, such as
a reduced efficiency of matching workers to jobs, for the rise in
unemployment since 2007. If that were the case, why would firms now find
it so easy to fill positions? Other evidence also points to the dominant
role of cyclical forces in the recent rise in unemployment: job losses
have been widespread, rather than being concentrated in the construction
and financial sectors, and the co-movement of job vacancies and
unemployment over the past few years does not appear to be unusual.
As I mentioned, I expect several factors to restrain the pace of
the recovery and the corresponding improvement in the labor market going
forward. The housing sector remains a source of very significant
headwinds. Housing has typically been a driver of economic recoveries,
and we have seen some modest improvement recently, but continued
uncertainties over the direction of house prices, and very restricted
mortgage credit availability for all but the most creditworthy buyers,
will likely weigh on housing demand for some time to come. When housing
demand does pick up more noticeably, the huge overhang of both
unoccupied dwellings and homes in the foreclosure pipeline will likely
allow a good deal of that demand to be met for a time without a sizeable
expansion in homebuilding. Moreover, the enormous toll on household
wealth resulting from the collapse of house prices–almost a 35 percent
decline from its 2006 peak, according to the Case-Shiller index–imposes
ongoing restraint on consumer spending, and the loss of home equity has
impaired many householdsf ability to borrow. A second headwind that
will likely become more important over coming months relates to fiscal
policy. At the federal level, stimulus-related policies are scheduled to
wind down, while both defense and nondefense purchases are expected to
decline in inflation-adjusted terms over the next several years. Toward
the end of this year, important decisions regarding the extension of
current federal tax and budget policies loom. I will return to the
associated uncertainties and their potentially detrimental effects
later.
A third factor weighing on the outlook is the likely sluggish pace
of economic growth abroad. Strains in global financial markets have
resurfaced in recent months, reflecting renewed uncertainty about the
resolution of the European situation. Risk premiums on sovereign debt
and other securities have risen again in many European countries, while
European banks continue to face pressure to shrink their balance sheets.
Even without a further intensification of stresses, the slowdown in
economic activity in Europe will likely hold back U.S. export growth.
Moreover, the perceived risks surrounding the European situation are
already having a meaningful effect on financial conditions here in the
United States, further weighing on the prospects for U.S. growth. Given
these formidable challenges, most private sector forecasters expect only
gradual improvement in the labor market and I share their view. Figure 2
shows the unemployment rate together with the median forecast from last
monthfs Survey of Professional Forecasters (SPF), the dashed blue
line.
-more- (1 of 4)
** MNI **
[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$]
