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 carried on his approach with barely a hiccup.
She might one day recall her first six months as a too-brief honeymoon.
The perilous question that awaits Yellen’s Fed has put investors on nervous alert: Can it raise rates from record lows without weakening the US economy or spooking markets?
Or, conversely, will it wait too long to raise rates, causing the economy to overheat and inflation to surge?
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 US job market.
What she says, or perhaps does not say, will shape perceptions of when and how aggressively the Fed will raise rates.
She has frequently characterized the job market as weaker than the unemployment rate suggests. She has noted that the jobless rate, 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 looked for a job for more than six months or stopped looking.
Might Yellen describe those trends as chronic problems with no end in sight? Or temporary drags on the job market, destined to fade as the economy improves? Investors will seek a sign of a coming rate hike as it would mean higher rates on business and consumer loans and could hurt stock prices.
At Jackson Hole, Bernanke sometimes used his speeches to telegraph actions the Fed was considering. Yellen could take the opportunity to shed light on the Fed’s plans for withdrawing the extraordinary support it has provided since 2008.
‘‘The road ahead will get much tougher for Yellen when she starts outlining the Fed’s exit strategy,’’ said David Jones, an 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 emphasized that 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. The market has remained calm, and stocks are up this year, suggesting that Yellen’s reassurances have had an effect.
But her first six months have had stumbles. Responding to a question in her first press conference, Yellen said that when the Fed stated it would keep its benchmark rate ultra-low for a ‘‘considerable time’’ after its bond purchases end, that phrase meant around six months. Stocks sank on fears that rate increases could start sooner than expected.
Asked about her six-month comment at her next press conference, Yellen decoupled the phrase ‘‘considerable time’’ from any specific period.
‘‘It depends on how the economy progresses,’’ she explained.
Diane Swonk, chief economist at Mesirow Financial, said Yellen was trying to be clear without perhaps recognizing how much a Fed chair’s words can be over-interpreted.
‘‘Yellen is a much clearer speaker than past Fed chairmen,’’ Swonk said. ‘‘But Yellen learned the dangers from being too clear. She will never use the words ‘six months’ again.’’
Yellen has appeared comfortable fielding questions and has withstood grilling from members of Congress. She has remained cool and has parried attacks in a calm voice that hints of her native Brooklyn.
‘‘It would be a grave mistake for the Fed to commit to conduct monetary policy according to a mathematical rule,’’ Yellen explained to the House Financial Services Committee after some Republicans pressed her to back legislation to compel the Fed to follow a policy rule in setting rates.