In a speech Tuesday marked by large doses of both statistics and humility, Federal Reserve Chairwoman Janet L. Yellen said that the economic outlook is highly uncertain, suggesting that the central bank will proceed slowly in raising interest rates and scaling back easy-money policies.
The Fed has been moving to reduce monetary support for the economy based on an assessment that the labor market is strengthening and that inflation, which has been unusually low, will soon stabilize.
Last week, the Fed announced it would begin unwinding the massive bond-buying effort it began after the financial crisis of 2007-08 and signaled that another interest rate hike, after two small increases this year, would come by December's end. Policymakers foresee three rate hikes for next year.
But Yellen suggested that the future policy course was uncertain.
"My colleagues and I may have misjudged the strength of the labor market," she said at a conference of the National Assn. for Business Economics in Cleveland. She said the same about "the degree to which longer-run inflation expectations are consistent with our inflation objective, or even the fundamental forces driving inflation."
Inflation has been running persistently below the Fed's 2% target, puzzling economists and causing policymakers to be hesitant in raising rates. Yellen said that she still expected inflation to move up to the Fed's desired goal in coming months, but she noted that the labor market, which historically has been closely linked to inflation, may not be as tight as the low unemployment rate suggests.
In the last five months, the nation's jobless figure has vacillated between 4.3% and 4.4%, a level most Fed officials see as essentially full employment, in which almost everyone capable and willing to work has a job.
Yet even as more employers have been reporting trouble finding workers, there's been little indication of a pickup in wage increases, which on average have remained modest, rising at an annual pace of about 2.5%.
Because of demographic and other structural changes, Yellen said, "the unemployment rate that is sustainable today may be lower than the rate that was sustainable in the past."
The low rate of wage increases could indicate that the labor market has more slack than economists had believed — something at which Yellen got a close-up, nonstatistical look later in the day.
After addressing the gathering of largely professional economists, Yellen went to a manufacturing job-training center at Cuyahoga Community College in the more gritty eastern part of the city.
Yellen has periodically visited such sites during her term as Fed chief, having done so in Chicago, Boston and Philadelphia, publicizing her interest in the real-life world of workers but also as a reality check on economic theories and data.
Among the people she met at Cuyahoga was student Jessica Dicus.
Dicus, 37, said she has been out of the labor force for the last 10 years, as a stay-at-home mom raising her three children. But with her kids now in school and the labor market looking better, Dicus recently signed up for an eight-week manufacturing program at the school.
She is halfway through the training, which set her back about $4,200. Once her classes are complete, Dicus said, she expects to land a job as a machine operator at Swagelok, a private maker of tubes, fittings and other parts used in a variety of industries.
In a round-table discussion with students, instructors and community leaders, Dicus told Yellen that she would like to see more apprenticeship programs like those at Cuyahoga, so that when her children come of age, they would have something waiting for them if they did not go to college.
The Fed, of course, doesn't run apprenticeship or other job programs, but the central bank's mandate is to maintain stable prices and maximize employment. The Great Recession wiped out millions of jobs, and many people who were pushed out have not returned to the labor market.
The labor-force participation rate in places such as Cleveland is particularly low, and over the years, Yellen has advocated holding down interest rates to support economic growth and help more people reenter the job market. But just how many can, or will, return to work remains a big question.
Job developers and community leaders at Cuyahoga spoke about an array of economic and social barriers, including the opioid drug problem, population decline, and most acutely the lack of worker skills which hampers many employers who want to hire.
Yellen, in her speech, said that the subdued wage growth probably reflects the sluggish productivity in recent years, but she also said that some employers have responded to the difficulty in finding qualified workers by expanding training and offering signing bonuses — "possible harbingers of stronger wage gains to come."
Getting a fix on wage trends will help the Fed's policymaking. But there are other uncertainties affecting the inflation outlook, she said.
Inflation expectations are important in actual inflation outcomes as businesses and consumers make decisions based on them, but Yellen noted: "There is a risk that inflation expectations may not be as well anchored as they appear and perhaps are not consistent with our 2% goal."
Several other factors could be restraining inflation as well, the Fed chief said. They include healthcare prices, which have not grown as fast as in the past, and the growing competition from online shopping, which may be making it tough for businesses to raise prices.
"How should policy be formulated in the face of such significant uncertainties?" Yellen asked. "In my view, it strengthens the case for a gradual pace of adjustments," although she added: "we should be wary of raising rates too gradually."
In a question-and-answer session at the conclusion of her speech, Yellen cautioned that policymakers also should be prepared for surprises and shocks.
"Nothing is set in stone," she said.
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2:45 p.m.: This article was updated with reporting from Yellen's visit to a community college.