Sunday, March 23, 2014

Yellen's Dashboard
As I noted last week, Fed Chair Janet Yellen didn’t sprinkle any fairy dust on the stock market on Wednesday. However, she is still the Fairy Godmother of the Bull Market given that stocks rebounded smartly on Thursday as investors reconsidered her six-month definition of “considerable time” between the end of QE and the beginning of higher interest rates.

Some Fed watchers concluded that she wants to show the markets that she isn’t as dovish as widely believed and that she is already positioning the Fed to stop speculative bubbles by raising interest rates starting around mid-2015. Indeed, on Friday, Fed Governor Jeremy Stein presented a speech on the importance of incorporating financial stability considerations into monetary policy decision-making. Under the Dodd-Frank Act, the Fed has an implicit third mandate, namely to maintain financial stability. The Act set up the Financial Stability Oversight Council (FSOC). The Fed chair is a member of the FSOC.

In any event, speculative bubbles weren’t mention once in Yellen’s press conference last Wednesday. On the other hand, Yellen gave a fairly lengthy and detailed account of the economic indicators that are on her “dashboard.” We've compiled a chart book of them, which happen all to be focused on the labor market. (See Yellen's Dashboard.) She had mentioned most of them in previous speeches. What was new was her focus on wage inflation.
The final thing I've mentioned is wages and wage growth has really been very low. I know there is perhaps one isolated measure of wage growth that suggests some uptick, but most measures of wage increase are running at very low levels. In fact, with the productivity growth we have, and two percent inflation, one would probably expect to see, on an ongoing basis, something between perhaps three and four percent wage inflation; [that] would be normal. Wage inflation has been running at two percent. So not only is it depressed, signaling weakness in the labor market, but it is certainly not flashing an increase… and it might signal some tightening or meaningful pressures on inflation, at least over time. And I would say we're not seeing that.
(Based on an excerpt from YRI Morning Briefing)

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