On Friday, Fed Chair Janet Yellen delivered a speech entitled “Recent Development and the Outlook for the Economy” at the City Club, Cleveland, Ohio. What can we learn from it?
In some respects the recent speech was similar to that given in Rhode Island. Yellen reminded that the GDP had edged down in the first quarter; however it was mostly due to transitory factors and some statistical noise. She also indirectly admitted that monetary policy is somewhat helpless and cannot create real prosperity, by pointing out again that: “the most important factor determining continued advances in living standards is productivity growth, defined as the rate of increase in how much a worker can produce in an hour of work”. In a flash of genius, the Fed Chair said that sluggish wage growth may be caused by fairly weak productivity growth. And because we should not expect sudden improvement in productivity, wage growth will probably remain slow, which will be an argument against raising interest rates.
The most cited part of the speech was about the timing of the interest rate hike. According to Yellen, “it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy.” However, this statement was immediately followed by a caveat that “the course of the economy and inflation remains highly uncertain, and unanticipated developments could delay or accelerate this first step.” So, essentially she did not shed any light on anything.
The most interesting part was probably about the labor market, because the Fed Chair pointed strongly to her concerns that U.S. labor markets remain weak and sounded much more pessimistic than Vice Chairman Stanly Fisher in his recent speech at the University of Oxford, when he said: “U.S. labor markets have continued to improve”, although “some room remains for further improvement” (he also admitted that after the Fed’s hike we can expect international spillovers and capital outflows from emerging market and developing economies).
Yellen noted that many indicators suggest that “the labor market has improved, but it still has not fully recovered”, and said: “the national unemployment rate has declined markedly during the economic recovery. But it is my judgment that the lower level of the unemployment rate today probably does not fully capture the extent of slack remaining in the labor market”. This is an important point, and we have always pointed out that the official unemployment rate in isolation does not reflect the labor market situation.
Summing up, the Fed Chair did not shed any light on anything. She expects a rate hike this year, but cites labor market weakness and brilliantly points out that the economic development is uncertain. The truth is that the Fed does not know the optimal monetary policy in pretty much the same way as Soviet central planners did not know the appropriate price of steel or shoes. This month marks six years since the end of the Great Recession, so the economy may fall into another recession before the central bankers finally hike interest rates. The longer they do not increase them, the better for the gold prices.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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