Fed No.2 Janet Yellen left the door wide open for a shift toward QE3, which has appeared more likely since the May jobs report.
She noted “headwinds” in her comments before the Boston Economic Club.
Her observations about headwinds added nothing to the date. The dual weight housing and unemployment has not lifted much she reasoned. Europe looms as a potential problem:
As I mentioned, I expect several factors to restrain the pace of the recovery and the corresponding improvement in the labor market going forward. The housing sector remains a source of very significant headwinds. Housing has typically been a driver of economic recoveries, and we have seen some modest improvement recently, but continued uncertainties over the direction of house prices, and very restricted mortgage credit availability for all but the most creditworthy buyers, will likely weigh on housing demand for some time to come.
Currently, the unemployment rate stands around 3 percentage points above where it was at the onset of the recession–a figure that is stark enough as it is, but does not even take account of the millions more who have left the labor force or who would have joined under more normal circumstances in the past four years. All told, only about half of the collapse in private payroll employment in 2008 and 2009 has been reversed. A critical question for monetary policy is the extent to which these numbers reflect a shortfall from full employment versus a rise in structural unemployment. While the magnitude of structural unemployment is uncertain, I read the evidence as suggesting that the bulk of the rise during the recession was cyclical, not structural in nature.
A third factor weighing on the outlook is the likely sluggish pace of economic growth abroad. Strains in global financial markets have resurfaced in recent months, reflecting renewed uncertainty about the resolution of the European situation. Risk premiums on sovereign debt and other securities have risen again in many European countries, while European banks continue to face pressure to shrink their balance sheets. Even without a further intensification of stresses, the slowdown in economic activity in Europe will likely hold back U.S. export growth
Douglas A. McIntyre