The Federal Reserve's intensive focus on a wide range of labour market data to guide policy-making is driving a wedge between its core decision-makers and others who feel the central bank is straying from traditional guideposts. In a speech here on Friday, Fed Chair Janet Yellen gave her most detailed analysis yet of what still plagues the American labour market five years after the recession, from stagnant wages to the large number of part-time workers to those who have given up the search for work.
She concluded that, though hard to measure, there is still considerable slack in the economy and the Fed should not rush to tighten monetary policy until the picture becomes clearer. But with broader measures showing strong improvement, concern is building within the Fed that Yellen's novel use of a broad range of jobs data is more distracting than informative.
At least two Federal Reserve regional presidents have called on Yellen and other core policymakers - Vice Chair Stanley Fischer and others who share a dovish tilt - to set aside the range of jobs information and focus simply on job growth and unemployment, which they say have proven reliable over the years. "To come in with other indicators seems to me to be falling outside the tradition of what we've done with monetary policy. Non-farm payrolls and unemployment are probably the best indicators," James Bullard, president of the St. Louis Reserve Bank, said in an interview with Reuters. "These other things, historically, have not been good for predicting what was going to happen in the economy."
The unemployment rate in July ticked up 1/10th of a percentage point to 6.2 percent. But it has fallen from 7.3 percent a year earlier and is closing in on the 5.5-percent range that the Fed sees as sustainable. Job growth in July topped 200,000 for a sixth straight month.
Bullard, who is not a voting member this year of the Fed's policy-setting committee, cited the labour force participation rate - the percentage of working-age Americans who are actually working or want to work - as an indicator under intense scrutiny, even though the Fed rarely cared much about it in the past.
Charles Plosser, head of the Philadelphia Fed and a voting member this year, said Yellen's speech on Friday underscored the issue of trying to solve labour market problems that the Fed simply cannot fix. "We've got ourselves tied up in a very difficult problem because we focused so much on employment," he told Reuters. "There is no literature, even theoretical, that tells us that monetary policy can reduce the number of part-time people employed for economic reasons," he added, mentioning one piece of jobs data that Yellen often cites. "We're trying to get the labour market to make all these changes at the margins, but we don't know how to do it or whether it will work."
Plosser and Bullard are two of the handful of "hawks" on the Fed's 17-member body. While their criticisms can be loud, a quieter group of centrist policymakers, including five Fed governors, often hold sway over the direction of policy. Bullard stopped short of saying the issue over labour market data was dividing the Fed, saying that discussion of the topic was a "healthy debate". "We love to argue about the data," he said, describing the debate as appropriate. But that the Fed is debating the issue is in itself significant.
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