3 big things to look for in Yellen’s first monetary policy speech

Federal Reserve Chief Janet Yellen has been a busy lady. In the past few weeks, she has faced down the ravaging pack of media hounds known as the central bank’s press corps, communed with struggling workers in Chicago and delved into the debate over bank capital standards.

The only thing she hasn’t done is give a speech on monetary policy.

But that will likely change on Wednesday, when Yellen is slated to address the Economic Club of New York. The venue seems apt for a full-throated discussion of the Fed’s ongoing efforts to stimulate the economy. The club’s chairman is Roger Ferguson, head of retirement investment firm TIAA-CREF and Yellen’s former colleague on the central bank’s board of governors. After her speech, Yellen will be questioned by Goldman Sachs strategist Abby Joseph Cohen and Harvard University economist Martin Feldstein, a vocal critic of the Fed’s easy-money stance.

What will she say? Yellen has proved willing to push the envelope of Fed communication, both in official policy statements and in the way the central bank portrays itself to the public. But Wednesday’s speech will likely serve up more traditional monetary policy fare. Here are three topics we expect she will cover:

Labor market dashboard
In past speeches, Yellen has cited 10 economic indicators that she is watching to determine the health of the labor market. The dashboard not only includes standard measures such as the unemployment rate and payroll job growth, but also average hourly earnings, jobs quits and hires, and long-term unemployment.

Economists Andy Laperriere and Roberto Perli at Cornerstone Macro have summarized these indicators into one handy chart -- and it shows just how weak the labor market remains.


And here’s what we can extrapolate from the chart about when the Fed might begin to raise interest rates.


Of course, structural issues in the labor market could cause the Fed to act more quickly, bringing forward the first rate hike to mid-2015, Cornerstone estimates. And if the economy takes off, the Fed may have to move even sooner, perhaps in the first half of next year.

Patience on inflation
Pushing in the other direction are inflation readings that are too low for the Fed’s taste. The central bank has set a 2 percent target for price increases, and it is sorely missing the mark.

Yellen and her predecessor, Ben Bernanke, have argued that low inflation allows the Fed to be patient in withdrawing its support for the economy. The central bank anticipates that inflation will slowly return to its goal over time, but some officials -- like Chicago Fed President Charles Evans -- are growing antsy. At some point, low inflation could itself become a problem.

The Fed may be encouraged by data released Tuesday showing a surprising pickup in the consumer price index. Prices have risen 1.5 percent over the past year. However, the Fed prefers a different measure of inflation, which is trending even lower.

cpi

Financial stability
Yellen could reiterate her argument that concerns that the Fed’s policies are stoking excessive risk-taking in financial markets should be addressed through its regulatory arm. In a short speech Tuesday to open a conference at the Atlanta Fed, she discussed the importance of higher capital requirements and liquidity standards in strengthening the banking system and said even tougher rules might be in order.

In other words, safeguarding the financial system is the responsibility of regulatory -- not monetary -- policy.

Ylan Q. Mui is a financial reporter at The Washington Post covering the Federal Reserve and the economy.
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