By Michael Aneiro
Fans of the ’80s Atari video game Tempest might see something familiar-looking in RBS‘s latest attempt to graphically quantify the Federal Reserve’s preferred labor-market metrics, and hence ultimately figure out the Fed’s timetable for raising short-term interest rates:
Before March, the Fed said its two main economic targets – used to determine when it might raise short-term rates – were the unemployment rate falling below 6.5% and a rate of inflation above 2%. Then Janet Yellen took over the Fed and scrapped the unemployment rate threshold in favor of a hodgepodge of more loosely defined labor-market metrics. RBS tries to map those factors that the market thinks are most important to the Fed these days, and as the lines draw closer to the center of the web, we move closer to the day the Fed might raise rates, which the conventional wisdom sees happening sometime late next year.
RBS’s economics team of Michelle Girard, Omair Sharif, Guy Berger and Deepika Dayal say the overall degree of labor-market slack didn’t change much over the past month. Here they further explain the “Yellen Web”:
In her press conference following the March FOMC meeting, Yellen identified a set of indicators that she thinks are relevant in assessing labor market conditions. The “dashboard” essentially boiled down to nine indicators: the unemployment rate (U3), the labor force participation rate, discouraged workers as a percent of those not in labor force, other marginally attached workers as percent of those not in labor force, total employed part-time for economic reasons (or “involuntary part-time workers”) as a percent of the civilian labor force, long-term unemployment as a share of total unemployment, the job openings rate, the quits rate, and the hires rate.
Using a methodology similar to that employed by the Bank of England, we created a spider chart for these nine indicators identified. In the chart, the orange line shows the difference, in number of standard deviations, between the current value of each indicator and its pre-crisis average (note: for the unemployment rate and the labor force participation rate, we first calculate the gap between most recent monthly level and the equilibrium or trend rate, and then show the difference, in number of standard deviations, between that gap and the average gap from 1994-2007).