Investors await Yellen's words from Wyoming, where Fed meets this week

Janet Yellen

Fed Chair Janet Yellen is expected to offer some hints this week about the central bank's direction during the annual symposium in Jackson Hole, Wyo. (Andrew Harrer, Bloomberg)

This week, the Federal Reserve will go into one of the most carefully scrutinized events of the year when it debates whether employment has healed enough to let interest rates start to rise.

On Friday, Federal Reserve Chair Janet Yellen will speak at the annual Fed meeting in Jackson Hole, Wyo., an annual event that investors watch closely for hints into the future of the economy and stock market.

Investors are hoping to hear Yellen express concerns about the number of Americans unable to get solid jobs. They also want her to commit to keeping interest rates low to spur employment gains.

Investors and some analysts want to hear very different messages.


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Some analysts think it's time to let interest rates rise so the Fed doesn't unwittingly ignite inflation or drive investors to take too many risks as they seek higher yields than Treasury bonds.

Low rates have been a treat — a green light to buy stocks even though stocks and risky bonds have become pricey. The recent run-up in the stock market suggests investors continue to think their bet on low rates remains secure. Typically, when investors start to sense a change in interest rates is coming, they get jittery about stocks and the market gets volatile.

In a report this week, Wells Capital Management strategist James Paulsen said investors should start preparing for a less stable time for stock investors.

"While the (Jackson Hole) assembly is mostly ceremonial, the decision on when and by how fast to raise short-term interest rates could prove unusually important for investors in this recovery cycle," he said. When the Fed begins to raise rates, the "rate hikes are likely to prove more aggressive and shocking."

Most analysts still think the hints for future rate hikes are not likely to come now. Stock market strategist Ed Yardeni, of Yardeni Research, told clients in a note Tuesday that he has considered Yellen the "Fairy Grandmother of the Bull Market."

"Stock prices tend to rise after she speaks," he said.

He assumes that will be the case this week because Yellen has seemed steadfast in her belief that the job market remains troubled and needs continued Fed stimulus. She has noted that the history of the Great Depression suggests that raising rates too quickly could be disastrous, Yardeni said.

While the unemployment rate has improved substantially, dropping to just 6.2 percent in July, Yellen says the official unemployment rate doesn't reflect the actual strains Americans are having finding jobs or the pressures joblessness is putting on households and the economy.

She contends that low wage growth in particular suggests job seekers are so plentiful that employers haven't needed to pay more to attract or keep employees.

A new study by the Chicago Federal Reserve supports that view. Researchers Daniel Aaronson and Andrew Jordan found that "slack in the jobs market still weighs heavily on the real wage prospects of U.S. workers," as millions remain unemployed or work part time when they'd rather have full-time work.

The researchers estimate that if the economy had been stronger and absorbed these workers, the average real wage growth would have been roughly a half of a percentage point to 1 percentage point higher.

Instead, since the Great Recession, average hourly earnings have risen at a 2 percent pace. That's lower than during any other expansion in the past 50 years, according to Citigroup economist Willem Buiter.

With unemployment falling from 10 percent in 2009, the historical relationship between the unemployment rate and real wages would have predicted real wage growth to have been 3.6 percentage points higher than its been.

"Instead, real wage growth has been relatively flat over the past few years," Chicago Fed researchers said.

The impact of poor wages and job prospects has been evident lately in weak retail sales numbers as consumers remain cautious about spending money. During the second-quarter earnings reporting season, only 48 percent of retailers were able to exceed analysts' profit expectations. Yet, companies across a broad range of sectors in the economy did much better. More than 70 percent of the large companies in the Standard & Poor's 500 beat profit expectations.

Some economists have been puzzled by the softness in consumer spending as they have observed the improvement in the employment rate and the gains in net worth of Americans generally. But the overall numbers are misleading.

According to research by the National Employment Law Project, lower-wage industries accounted for 41 percent of new jobs from July 2013 to July 2014, and wages declined from pre-recession levels in many of those jobs — from retail salespeople to cooks. Lower-wage industries employed 2.3 million more workers than at the start of the recession. Yet higher wage industries have 522,000 fewer jobs than before the recession, according to the research, and accounted for only 33 percent of new jobs.

Likewise, although Americans as a group have regained the wealth they lost during the recession, the average household is worse off, according to research by Standard & Poor's. The average household's net worth is 2.2 percent behind pre-recession levels and home values remain about 17.8 percent below early 2006 levels.

gmarksjarvis@tribune.com

Twitter @gailmarksjarvis

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