During statements before Congress, yesterday, Federal Reserve Chair Janet Yellen said the harsh winter being experienced through most of the nation was having a bigger impact on data then analysts thought it would. She reiterated that the accommodative monetary policy the Fed has been employing, with near zero rates, would continue for some time.
Since her appearance before the House committee, she has seen several weaker than expected data releases that have given her and the Fed some pause. She thinks some of the softness is weather related, but how much is still too early to tell.
Jobless Claims Shoot Higher
This week showed that the number of Americans filing jobless claims shot higher. More than expected. The number increased 14,000 to a seasonally adjusted average of 348,000. Claims for the prior week were adjusted lower by 2,000 applications.
Yellen feels that the tight fiscal policy is dragging on the US economy but is also having an effect on monetary policy. She feels the drag should lessen during the course of the year, but there will always be some drag. The drag on fiscal policy has been larger but there is no concern about “broad bubble concerns” as they are monitory some areas very closely. For example, underwriting standards in leveraged lending has been deteriorating. The Fed has met this concern with stricter regulatory policies and more supervision.
6.5 Percent Unemployment is not Full Employment
Yellen stresses that 6.5 percent unemployment does not meet the standard or definition of full employment. The unemployment, alone, is not a sufficient gauge to measure the overall health of the job market. The Fed will not raise rates until unemployment is well at or below 6.5 percent and inflation hits the target at 2.5 percent.
There is an additional 5 percent of the labor force working part time for economic reasons. There is a high rate of Americans unemployed for long periods of time. The Fed, is now taking all of this into consideration and understanding the labor market I not as good or strong as we would like it to be.
The Fed needs a stronger grip on the series of weaker than expected data. Is it due to the weather or is their underlying structural concerns? The Fed has kept rates ultra low for a long time, they have swollen their balance sheet to$4 trillion to stimulate investment and the economy. Is all this now coming back to bite the economy in a bad way? We need more data to decide and until the Fed really knows the truth, expect them to stick the course.