Yellen Details "Substantial Improvement in Labor Market Outlook"
The Federal Open Market Committee (FOMC) has stated its intention to continue its large-scale purchases of securities until there is "substantial improvement in the outlook for the labor market." In a March 4 speech, "Challenges Confronting Monetary Policy," Federal Reserve Vice Chair Janet Yellen discussed some of the information she will use to define "substantial improvement."
By way of background, the FOMC last September started a new asset purchase program and then extended it in December. Under this program, the central bank each month is buying $40 billion in agency-guaranteed mortgage backed securities and $45 billion in longer-term Treasury securities.
The asset purchase program is meant to strengthen the economic recovery, or, Yellen said, "to help the economy attain escape velocity." By lowering longer-term interest rates, these asset purchases should encourage spending, especially on interest-sensitive purchases such as houses, automobiles, and other consumer durables like appliances, Yellen pointed out during her remarks at the 2013 National Association for Business Economics Policy Conference in Washington, D.C.
Yellen will consider an array of factors
First among those factors the vice chair weighs will be the unemployment rate. While not a perfect window into the labor market, Fed research concludes that the headline unemployment rate is probably the best single vital sign of the labor market and a good predictor of future developments, according to the vice chair.
Other indicators carry weight
In determining substantial improvement in the jobs outlook, Yellen said she will likely also take into account: measures of gross job flows, such as job loss and hiring, which describe the underlying dynamics of the labor market; and her forecast of the overall pace of spending and growth in the economy.
"A decline in unemployment, when it is not accompanied by sufficiently strong growth, may not indicate a substantial improvement in the labor market outlook," she said. "Similarly, a convincing pickup in growth that is expected to be sustained could prompt a determination that the outlook for the labor market had substantially improved even absent any substantial decline at that point in the unemployment rate."March 20, 2013