Janet Yellen speaks: Markets listen!

When Janet Yellen, the chair of the Federal Reserve, speaks, markets listen and market participants try to gauge how our economy will be impacted.

Yellen can instigate economic behavior both nationally and right here in Bluffton and on Hilton Head Island, so let’s examine her remarks at the Aug. 22 fed meetings in Jackson Hole, Wyo.

The Fed, and specifically the Federal Open Market Committee (FOMC), takes seriously the dual mandate given to them by Congress.

The first mandate is to be the governor that controls levels of inflation, and second, to maximize employment.

In Jackson Hole, the chairperson reemphasized those two objectives, but then went on to say that factors determining maximum employment may have changed over time and, in fact, they may no longer be measurable! She has introduced the concept of “labor market slack” and indicates that this is front and center in FOMC deliberations.

So what is “labor market slack” and why should we, here in southern Beaufort County, care?

Estimates of “labor slack” require making judgments about the interaction of (a) the labor market participation rate; (b) the extent that part-time employment is the result of economic reasons; and (c) the hiring rate and quitting rate.

As we are all well aware, retirement has been credited with the reduction in the participation rate and our local economy relies on a disproportionate number of part-time employees.

Believe it or not, some economists believe that as many as 75 percent of those who have retired between 2009 and present would return to work given the opportunity.

To illustrate what Yellen and her colleagues are dealing with had the labor market participation rate stayed level with June 2009 labor force levels today, the official unemployment rate would be 10.8 percent instead of the current 6.2 percent.

Today, part-time workers nationwide represent 5 percent of the total workforce, or 7.5 million people, up sharply from fewer than 5 million folks in January 2008. While part-timers have fallen from over 9 million individuals between 2009 and 2010, they still remain at an elevated rate. Finally, Yellen is calculating in the hire and quit rates.

You will be hearing a whole lot about the JOLTS report, which is a product of these numbers, but a careful read will suggest there won’t be significant wage inflation coming along if these trends persist.

So what does this all mean to us?

As a community that is significantly influenced by retirees that are dependent upon savings and investments for income, we need to have a sense for interest rates and FOMC behavior. Understanding the “Dual Mandate” of full employment and manageable inflation (today’s target rate is 2 percent) is critical to our individual financial health.

I think the take-away here is we can expect more of the same, i.e., low interest rates and some level of “qualitative” stimulus for the foreseeable future.

The economic outlook, while always cloudy, appears to be more of the same with below-average growth in GDP, elevated “real” unemployment and very little inflation on the horizon. This, combined with a subpar real estate market driven by a significant reduction in new household formations, and a tax policy that discourages capital investment, spells a continued economic “funk.”

On a final thought: Can you imagine a global economy where a 10-year U.S. treasury note has a yield of 2.4 percent? A German 10-year bod yields .95 percent? A Spanish 10-year note yields 2.25 percent? And an Italian 10-year note yields 2.48 percent. So I ask you, “What are the world markets telling us?”

Elihu Spencer is a local amateur economist with a long business history in global finance. His life work has been centered on understanding credit cycles and their impact on local economies. The information contained in this article has been obtained from sources considered reliable but the accuracy cannot be guaranteed.