A Peek at Yellen’s Labor Market Dashboard Highlights Fed Concerns

As the market continues to digest stronger U.S. economic data, investors continue to grapple with the timing and prospect of rising interest rates. As highlighted in the Federal Reserve’s (Fed) most recent announcement,¹ the Federal Open Market Committee is focusing a great deal of attention on aspects of the labor market beyond the headline payroll numbers and unemployment rate. In addition to limited wage growth and uncertainty in the housing market, the significant underutilization of labor has been positioned as a key factor in its rationale for maintaining current monetary policy. In previous testimony, Fed chair Janet Yellen has referred to several indicators included in her labor market dashboard.² In this piece, we attempt to re-create the labor market dashboard and assess the progress the economy has made post-financial crisis. While many indicators suggest a full recovery (or at least substantial progress), a few indicators hint at little progress from crisis lows. Notably, labor force participation rates continue to decline and underemployment has shown little improvement so far in the recovery. People leaving the workforce and the number of long-term unemployed cast doubt on the improvement indicated by the headline employment numbers. Wage growth also remains numbingly lethargic. Currently, only 3 of 9 Factors Support a Return to Normalcy In addition to a tick up in wages, anecdotal evidence and economic releases pointing to stabilization in labor force participation rates or a fall in the underemployment rate could improve the Fed’s assessment of labor conditions. Monitoring these factors in upcoming Fed speeches, including the meeting in Jackson Hole August 21–23, could provide clearer insight into the path for future short-term rates in the United States. We believe that economic releases in the near future will provide the Fed with greater confidence in the domestic case for beginning to adjust monetary policy. As a result, interest rates will likely rise in anticipation of the Fed increasing short-term interest rates next year. As a result, we believe investors would be well served to reduce interest rate risk in their bond portfolios. As we have mentioned previously, we believe that the current risk/reward profile favors positions that will benefit from a rise in rates. With yields in most fixed income sectors near one-year lows, we believe that now may be a prudent time to reduce risk.         ¹Board of Governors of the Federal Reserve System, Federal Open Market Committee. 7/30/14.http://www.federalreserve.gov/newsevents/press/monetary/20140730a.htm ²Rich Miller and Michelle Jamrisko, “Yellen Jobs Dashboard Shows Rate Rise Far on Horizon: Economy,” Bloomberg, 4/2/14.