Fed inertia just means delayed rate rise

US Federal Reserve chairwoman Janet Yellen's keynote speech at the central bankers' Jackson Hole retreat last Friday might have seemed a dud, offering little direction to markets on when interest rates could rise. Yet, it was revealing in other ways. The speech seemed an admission that the all-powerful Fed does not yet know which way the labour market winds are blowing. This explains why the Fed has been reluctant to give markets a clearer idea to trade on.

The data is still mixed. Ms Yellen noted that it had been especially challenging to make an assessment on the extent of "slack", or spare capacity, in the labour market. Structural factors affecting the market, such as ageing and the hollowing out of mid-skilled jobs, are conflated with such cyclical factors as a business downturn that America is recovering from.

A now-ditched guide the Fed used to guide markets on when it might raise interest rates is the unemployment rate. The US unemployment rate had fallen faster than expected even while the broader labour market remained depressed. This was because the labour force participation rate has declined to historically low levels. Some had simply given up looking for work. In her Jackson Hole speech, Ms Yellen mused that it is unclear how much the drop in the participation rate is because of cyclical, as opposed to structural, reasons. For example, people might have brought forward retirement plans due to the weak labour market. In the period ahead, retirements might contribute less to participation rate movements. The participation rate could very well increase in an economic recovery. Other complexities abound. In a nod to the inflation hawks, Ms Yellen said that labour market conditions might not be as weak as people think. Companies could have faced limits cutting wages during the recession and now, do not face the pressure to raise them as fast despite labour market tightening. Wage growth could also lag behind productivity increases. Nevertheless, in a boost to the doves, she also said that temporary wage pressures could also rise well before the labour market hits full capacity - hence it would be unwise to tighten prematurely. As usual, people tried to read between the lines of her deliberately vague speech. Some observers called it more hawkish than expected. Others said it was just another indication that the economic recovery will take longer to pan out. This time, the doves seem to have a stronger case. Ms Yellen's equivocation about economic indicators suggests the Fed will wait until things become crystal clear before announcing its first rate hike. This lends credence to bond manager Pimco's "new neutral" theory that interest rates will stay low for some time due to sluggish economic growth.