Fed’s embrace of labor market is complete at Jackson Hole, 20 years later

August 26, 2014

Fischer, vice chairman of the Federal Reserve System, speaks with a demonstrator at the Jackson Hole Economic Policy Symposium in Jackson HoleBy Michael Flaherty, Howard Schneider and Jonathan Spicer in Jackson Hole, Wyo.

To dig deeper into the significance of Federal Reserve Chair Janet Yellen’s message at the annual central banking summit in Jackson Hole this past weekend, go back twenty years to the same event, when a top Fed official sparked a firestorm by showing support for the labor market. At the end of the 1994 symposium, the new Fed vice chairman at the time, Alan Blinder, gave a 14 page overview in which he stressed the point that central banks have a role in reducing unemployment.

The comments prompted speculation that he was opposing the views of his free-market boss, Alan Greenspan, and a media frenzy ensued — a frenzy that people present at the time say Blinder never recovered from. The contrast between what happened at Jackson Hole two decades ago, and what happened there last week shows how far the Fed has swung in its embrace of the labor markets, and how far it is ready to go.

For Yellen, the deeper aim may lie in research discussed over the weekend. Several papers dealt with the risk that short term cyclical problems in labor markets could become long term problems if people are left out of jobs, lose skills or young people fail to get a foothold.

Her mission — her legacy — is to prevent that from happening.

During a break at this year’s symposium, the Fed’s current vice chair, Stanley Fischer, stepped into the Jackson Lake Lodge’s main lobby to meet with ten green-shirted activists, most of whom were unemployed. He listened to their stories, and assured them that he and his colleagues were doing everything they can. “This is a measure of how much the Fed world has changed,” said Blinder, now a Princeton professor and a guest at the event, referring to Fischer’s outreach.

Fischer’s move echoed Yellen’s sympathy and concentration on the unemployed, where she has stood by the belief that getting the labor market dynamics right is more important than a small uptick in inflation. People who have worked with Fischer say his interest in the stories of workers is genuine, as he is known for chatting up all levels of employees at the various institutions he’s worked for. Fischer’s track record also shows that he is not afraid to encourage an activist central bank to intervene where needed.

Yellen, with the Fed board behind her, is trying to ensure the central bank doesn’t cause disruptions in the recovering labor markets by tightening monetary policy too soon. But several Fed regional bank presidents, along with senior economists, are pushing the Fed to tighten faster, fearing inflationary pressures amid signs of a strengthening jobs market. 

Yellen nodded to this camp in her speech on Friday in Jackson Hole, but also delivered her most detailed defense yet of the Fed’s stance on the labor market, and why policy accommodation needs to remain in place. The stark difference between the pounding Blinder took for his view twenty years ago, and the largely positive reaction to Yellen’s message last week shows that labor market dynamics will remain a key issue for the Fed as long as Yellen is in charge.

The current Fed chair’s fixation with jobs data represents the longstanding battle within the central bank that she and like minded economists appear to have decisively won — and in doing so changed the course of how the Fed operates. The tone of Fed statements and Yellen’s speeches suggest that despite her recognition of improving jobs data, there is still a long list of problems inside labor markets that she feels need to improve — beyond just the unemployment rate, which is looking better and better. 

This year’s Jackson Hole symposium was titled “Re-evaluating Labor Market Dynamics,” and it was only the second time the event focused on the topic of jobs. The first time, of course, was 1994. That symposium, titled “Reducing Unemployment: Current Issues and Policy Options,” was in its thirteenth year in Wyoming, a location originally chosen so that former Fed Chairman Paul Volcker could peel off for some top notch fly fishing amid the stunning Teton mountains.

Blinder’s 1994 overview, which is again getting some notice in the press, included the line: “central banks, or more generally macroeconomic policies, do indeed have a role in reducing unemployment as well as…in reducing inflation.” He went on to say that to impact unemployment, a central banker must believe in Keynesian economics, or the belief that governments should intervene when an economy is suffering.

While those comments proved prescient, describing exactly what the Fed did in the aftermath of the 2008 financial crisis, journalists back then seized on the message as a snipe at Greenspan, who was more of a monetarist in the Milton Friedman tradition. In the media blitz that ensued, Greenspan did not rise to Blinder’s defense. A rift came between them, according to people present at the time, and two years later, Blinder resigned.

Fast forward to this past week, when Yellen’s reference to the Fed’s massive and ongoing asset-purchase program hints at the new era in monetary policy-making. The objective, she said, “was to achieve a substantial improvement in the outlook for the labor market.”

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