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US job market yet to recover from recession, says Fed Chair

Jim Watson, AFP

US labour markets remain hampered by the effects of the recession and the Federal Reserve should act cautiously on interest rates, Fed Chair Janet Yellen said on Friday in a defence of her policies.


In a speech at a central banking conference in Wyoming, USA, Yellen laid out why she felt the unemployment rate alone was inadequate to evaluate the strength of the US job market.

The jobless rate has fallen faster than expected, but Yellen said the economic disruption of the past five years had left millions of workers sidelined, discouraged, or stuck in part time jobs - facts that were not captured in the unemployment data alone.

Judging whether the economy was close to full employment was "complicated by ongoing shifts in the structure of the labour market and the possibility that the severe recession caused persistent changes in the labour market's functioning," Yellen said.

"Assessments of the degree of remaining slack in the labour market need to become more nuanced because of considerable uncertainty about the level of employment consistent with the Federal Reserve's dual mandate" of stable prices and full employment, she added.

In such an environment "there is no simple recipe for appropriate policy," Yellen said, arguing for a "pragmatic" and flexible approach that allows officials room to evaluate data as it arrives without committing to a preset policy path.

Recession fallout not fully understood

Overall, Yellen’s speech marked a defence of her basic premise that the 2007-2009 financial crisis and recession damaged the economy and work force in ways that are not yet fully understood.

The Fed has held benchmark rates near zero since December 2008, and has said it would wait a "considerable time" after winding down a stimulative bond-buying programme in October before raising them. Financial markets currently expect rates to rise during the middle of next year.

But the debate over Yellen's evaluation of labour markets - and over when to raise borrowing costs - is intensifying within the Fed's policy committee.

Some policymakers, including Kansas City Federal Reserve Bank President Esther George, the host of the Fed’s annual conference in Jackson Hole, Wyoming, are becoming more vocal in their view that the Fed should raise rates soon rather than later.

At the central bank's last policy meeting in July, some officials argued against characterising the amount of slack in the labour market as "significant," which the Fed did do in its post-meeting statement.

Determining the degree of labour market slack has become the central debate at the US central bank, and Yellen wants to be sure employment has recovered as fully as possible before raising interest rates.

Inflation "hawks" at the Fed, however, worry a continued near zero rate policy could cause inflation or asset bubbles.



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