WSJ Article on Yellen Speech

April 16th, 2014 1:02 pm | by John Jansen |

Victoria McGrane usually plays second fiddle to the illustrious Jon Hilsenrath. Today she is the lead character in the play and writes on the Yellen speech. This story is circulating in the market currently.

Via WSJ:

Economy Has Improved, but Outlook Remains Uncertain
By VICTORIA MCGRANE And BEN LEUBSDORF

NEW YORK—Three “big questions,” including the outlook for inflation, will guide Federal Reserve officials as they consider whether the economy is finally healthy enough for the central bank to step back from its low-interest rate policies, Fed Chairwoman Janet Yellen said Wednesday.
On the inflation question, Ms. Yellen said a too-low rate is a bigger worry than the Fed’s easy-money policies sparking a surge in consumer prices. She said she rated the chances of inflation threatening to rise substantially above the Fed’s 2% target “as significantly below the chances of inflation persisting below 2%.”
The comment underscores the Fed’s plan to keep interest rates low for many more months, though Ms. Yellen went to lengths to keep the central bank’s options open. “Because the course of the economy is uncertain, monetary policymakers need to carefully watch for signs that it is diverging from the baseline outlook and then respond in a systematic way,” Ms. Yellen said in remarks prepared for delivery to the Economic Club of New York.
Though Ms. Yellen avoided making strong policy proclamations, she tried to lay out in some more detail what officials will be looking at when they decide to start raising interest rates. Many market participants don’t expect rate increases until the middle of 2015.
In addition to inflation, Fed officials must monitor the amount of “slack” in the labor market and other unforeseen developments that could push the economy off its expected course, she said.
On the issue of labor-market slack—or the degree to which the labor market is operating below its potential—Ms. Yellen reiterated her arguments from a late-March speech that she sees quite a bit of slack left in the labor market in measures other than the official jobless rate, which stood at 6.7% in March. Among those indicators of slack: labor-market participation continues to remain near historical lows and the number of workers who want full-time positions but are currently in part-time jobs remains elevated.
Fed officials must also stay vigilant for the unexpected, Ms. Yellen stressed. “What factors may be pushing the recovery off track?” is the question they must keep asking themselves, she said, pointing to past moments since the end of the 2007-09 recession where the economy appeared to be turning a corner only to be derailed.
It is vital to effective monetary policy making for officials to “monitor the economy for signs that events are unfolding in a materially different manner than expected and adjust policy in response,” she said.
Labor-market slack, low inflation and vigilance on “unforeseen economic developments” are the wild cards that are “likely to loom large” in policy makers’ assessment of “where we are on the path back to maximum employment and price stability,” the two pieces of the Fed’s dual mandate, Ms. Yellen said.
“It is very welcome news that a return to these conditions has finally appeared in the medium-term outlook of many forecasters. But it will be much better news when this objective is reached,” she said.

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