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Recovery remains incomplete, Janet Yellen says

Janet L. Yellen said recovery cannot be judged by one factor.

SHAWN THEW/EPA

Janet L. Yellen said recovery cannot be judged by one factor.

JACKSON HOLE, Wyo. — Janet L. Yellen, the Federal Reserve chair, said Friday that the economy was improving but that the Fed was awaiting more evidence about the health of labor markets before deciding when to start raising interest rates.

Yellen’s first keynote speech at the annual conference here in the shadow of the Grand Tetons was mostly an extended explanation of the reasons for the Fed’s caution and an effort to buy time for the Fed to deliberate. She emphasized her view that no single factor, including inflation, could be used to judge the recovery.

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“While these assessments have always been imprecise and subject to revision, the task has become especially challenging in the aftermath of the Great Recession,” she said, because of the downturn’s “nearly unprecedented” depth and simultaneous changes in the economy, including the aging of the workforce.

Yellen broke little new ground in her speech. She reiterated the Fed’s basic guidance after its July meeting that holding short-term interest rates near zero remained necessary and useful to increase employment. She said that the gap between current conditions and a return to full health remained “significant.”

Acknowledging the uncertainty surrounding this assessment, Yellen added that the Fed was prepared to adjust as the economic evidence became clearer, either by moving more quickly to raise rates or by holding steady even longer. She said the Fed still expected to end the expansion of its bond holdings in October.

Investors generally expect the Fed to start raising interest rates in the summer of 2015 or slightly later, based on asset prices tied to the level of future rates. John Williams, the president of the Federal Reserve Bank of San Francisco and a prominent centrist, told CNBC on Friday that such expectations were a “reasonable guess.”

Some analysts, however, saw Yellen’s speech — along with the minutes of the Fed’s July meeting, released Wednesday — as evidence that the Fed has become a little more likely to raise rates earlier, if the economy keeps gaining strength.

“We do not believe she has changed her core views, but see the change in tone as a normal evolution based on the fact that the Fed is closer to achieving its dual mandate than at any point in the recovery and has found itself at this stage faster than expected,” Michael Gapen, director of US economic research at Barclays, wrote Friday in a note to clients after Yellen’s speech.

Yellen’s audience Friday included several internal critics of the stimulus campaign, including her host, Esther L. George, the president of the Federal Reserve Bank of Kansas City, which is sponsoring the conference, and Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia, who dissented at the last meeting of the Fed’s policymaking committee. Both argue that the Fed has neared the limits of its ability to improve the health of the economy, and that persisting in its efforts could loosen the central bank’s control over price inflation.

Yellen’s optimism that Fed policy can increase employment and wages is also challenged by a growing body of economic literature purporting to show that the decline of employment is caused largely by factors that predate the recession and that cannot be addressed by continuing to hold down interest rates.

The economists Stephen J. Davis, of the University of Chicago, and John Haltiwanger, of the University of Maryland, argued in a paper presented Friday at the conference that employment had declined because the labor market has stagnated in recent decades. Fewer people are leaving or losing jobs, and fewer are taking new ones.

“These results,” they wrote, “suggest the US economy faced serious impediments to high employment rates well before the Great Recession, and that sustained high employment is unlikely to return without restoring labor market fluidity.”

Yellen noted their work in her speech as part of a survey of all the things the Fed does not know about the economy — most important, “just how far the economy now stands from the attainment of its maximum employment goal.”

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