WASHINGTON — Janet Yellen has won credit for guiding the Federal Reserve’s first six months of transition from the Ben Bernanke era. Bernanke’s Fed had steered the economy through a deep crisis by slashing interest rates and restoring confidence in banks. Yellen has so far carried on his approach with barely a hiccup.
She may one day recall her first six months as a too-brief honeymoon.
The perilous question that now awaits Yellen’s Fed has put investors on nervous alert: Can it manage to raise rates from record lows without weakening the U.S. economy or spooking markets?
Or, conversely, will it wait too long to raise rates, causing the economy to overheat and inflation to surge?
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No one knows. Which helps explain the anticipation surrounding Yellen’s speech Friday at the economic conference sponsored every August in Jackson Hole, Wyo., by the Federal Reserve Bank of Kansas City. Given that this year’s topic is labor markets, Yellen is sure to spell out her latest assessment of the U.S. job market.
Whatever she says — or, perhaps, doesn’t say — will shape perceptions of when and how aggressively the Fed will raise rates.
Yellen has frequently characterized the job market as weaker than the unemployment rate suggests. She’s noted, for example, that the jobless rate, now a nearly normal 6.2 percent, belies other unhealthy trends: Weak pay growth, a sizable number of part-timers who want full-time work and high proportions of people who’ve been looking for a job for more than six months or have stopped looking.
Investors will seek any sign of a coming rate hike because it would mean higher rates on business and consumer loans and could hurt stock prices.
The Fed chair could take the opportunity to shed light on the Fed’s plans for withdrawing the extraordinary economic support it’s provided since 2008.
“The road ahead will get much tougher for Yellen when she starts outlining the Fed’s exit strategy,” said David Jones, chief economist at DMJ Advisors and the author of a book on the Fed’s first century. “Any change could be accompanied by significant market instability.”
This year, the Fed has been paring its monthly bond purchases, which have been intended to keep long-term rates low. Yellen has stressed that even after the bond purchases end this fall, the Fed will keep rates low and maintain its vast investment portfolio to keep downward pressure on rates.
The impending end of the purchases — a step investors once anticipated with dread — is now being taken in stride.
Yellen has stressed that the unorthodox steps the Fed took to fight the recession were needed to put people back to work. She has sought to reverse any perception that the Fed distributed billions to prop up big banks during the financial crisis while doing little to help people who had lost jobs.
“Our goal is to help Main Street, not Wall Street,” she declared in her first speech as chair. She spoke of “shattered lives and families” from high unemployment and said the Fed would keep working until the job market was healthy.
Many analysts think Yellen will use Friday’s speech to explain her continued support for low rates.
“Her position continues to be that the economy is improving but the labor market is not healthy enough to tolerate a hike in interest rates any time soon,” said Sung Won Sohn, an economics professor at California State University, Channel Islands.
Most economists doubt the Fed will raise rates before mid-2015. Even when it does, it’s expected to act only gradually — to limit inflation but avoid derailing the economy’s recovery.
Yet a so-called soft landing often proves elusive.
“The Fed usually gets it right only about half the time,” noted David Wyss, a former Fed economist who teaches at Brown University.