The economic calendar will lighten up, but earnings season continues to pick up steam on Thursday.
In the morning, the major economic data releases will be the weekly report on initial jobless claims as well as a monthly update on housing starts and building permits.
On the earnings side, we’ll get earnings out of Bank of New York Mellon (BK) in the morning, with the headliners likely to be after the close with results expected from IBM (IBM), American Express (AXP), and Schlumberger (SLB).
Yellen speaks
On Wednesday afternoon, Federal Reserve Chair Janet Yellen spoke at an event in San Francisco and, as expected, said the Fed would remain data dependent on when — and how quickly — to raise interest rates in the future.
“Now, many of you would love to know exactly when the next rate increase is coming and how high rates will rise,” Yellen said.
“The simple truth is, I can’t tell you because it will depend on how the economy actually evolves over coming months. The economy is vast and vastly complex, and its path can take surprising twists and turns. What I can tell you is what we expect–along with a very large caveat that our interest rate expectations will change as our outlook for the economy changes.”
Aside from the usual discussions of inflation rates, labor market slack, and how the monetary policy outlook will evolve, Yellen also harped on an idea that has become more popular among economists in recent years: productivity.
“A longer-term trend–slow productivity growth–helps explain why we don’t think dramatic interest rate increases are required to move our federal funds rate target back to neutral,” Yellen said.
“Labor productivity–that is, the output of goods and services per hour of work–has increased by only about 1/2 percent a year, on average, over the past six years or so and only 1-1/4 percent a year over the past decade. That contrasts with the previous 30 years when productivity grew a bit more than 2 percent a year.
“This productivity slowdown matters enormously because Americans’ standard of living depends on productivity growth. With productivity growth of 2 percent a year, the average standard of living will double roughly every 35 years. That means our children can reasonably hope to be better off economically than we are now. But productivity growth of 1 percent a year means the average standard of living will double only every 70 years.”
Last year, economist Robert Gordon’s book “The Rise and Fall of American Growth” really sparked the discussion on productivity and posited that the slowdown was largely related to technology. Others have asked whether productivity growth has only appeared to slow down and is doing so because of a measurement error.
The major upshot for monetary policy makers is that lower productivity will lead to a lower neutral rate, or a lower interest rate at which both full employment and price stability are present in the economy.
This matters for both savers and borrowers, as savers might struggle to meet retirement goals in a world — like the current one — that has a lack of safe assets earnings any meaningful real return. While borrowers will enjoy lower rates on debt if the economy finds equilibrium at a lower neutral rate.
The future, of course, still remains highly uncertain.
“Economics and monetary policy are, at best, inexact sciences,” Yellen said.
“Figuring out what the neutral interest rate is and setting the right path toward it is not like setting the thermostat in a house: You can’t just set the temperature at 68 degrees and walk away. And, because changes in monetary policy affect the economy with long lags sometimes, we must base our decisions on our best forecasts of an uncertain future. Thus, we must continually reassess and adjust our policies based on what we learn.”
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Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland
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