Why the Chicago Fed’s Evans advises patience in normalization



Dr. Charles Evans discusses labor market conditions

Chicago Fed Chief, Dr. Charles Evans spoke about the need for patience in normalizing monetary policy. He spoke at the “Conference on Labor Market Slack” at the Peterson Institute for International Economics, in Washington, D.C. on September 24, 2014. Although they’ve improved since the Great Recession, inflation and employment conditions were short of the Fed’s goals, he said.

Part 3

Labor market variables were contradictory. There was evidence of slack:

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  • The unemployment rate  fell from 10% in October 2009 to 6.1% in August 2014. It was still “too high.”
  • Labor force participation rates were at 35-year lows. The Chicago Fed estimated that they were 0.5%–1.25% below trend.
  • While the job openings rate was now at pre-recession levels, the hiring rate was still comparatively low. Low recruiting intensity, stricter hiring standards, and a mismatch of skills could be some of the reasons for this trend.
  • Wage growth remained depressed at 2.25%—compared to the 3%–4% benchmark implied by gains in productivity and inflation. Despite the declining unemployment rate, there was hardly any real wage growth.
  • The percentage of workers working part-time because they couldn’t get full-time jobs was also too high.

These factors implied that the Fed’s full employment goal hadn’t been reached yet. This called for monetary accommodation.

Investor impact

The labor market is critical for the consumption component of the gross domestic product (or GDP). Consumption expenditure makes up over two-thirds of the GDP. A delayed liftoff in the federal funds rate would benefit fixed income exchange-traded funds (or ETFs) like the Vanguard Total Bond Market ETF (BND) and the iShares 7-10 Year Treasury Bond ETF (IEF). An extended period of low rates would also imply better credit conditions for firms—for example, those included in the iShares Core S&P 500 ETF (IVV) and the Vanguard Total Stock Market ETF (VTI).

An accommodative monetary policy resulted in lower volatility in recent years. This affected returns on the iPath S&P 500 VIX Short-Term Futures ETN (VXX). Changes to the base rate would probably lead to higher volatility in markets.


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