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Yellen Is Watching These Four Indicators For Signals On When To Raise Rates

Janet Yellen and the Federal Reserve will be watching four key economic indicators to determine when inflation is stable enough to raise interest rates from near zero: 1. Continued improvement in the labor market and reduction in unemployment slack. 2. Stabilization of core inflation which excludes volatile food and energy prices. 3. Breakout of stagnant wage growth as the labor market strengthens. 4. Rise in inflation expectations among households and investors from current low levels. The Fed wants to feel reasonably confident that inflation will rise sustainably to their 2% target before raising interest rates.

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43 views4 pages

Yellen Is Watching These Four Indicators For Signals On When To Raise Rates

Janet Yellen and the Federal Reserve will be watching four key economic indicators to determine when inflation is stable enough to raise interest rates from near zero: 1. Continued improvement in the labor market and reduction in unemployment slack. 2. Stabilization of core inflation which excludes volatile food and energy prices. 3. Breakout of stagnant wage growth as the labor market strengthens. 4. Rise in inflation expectations among households and investors from current low levels. The Fed wants to feel reasonably confident that inflation will rise sustainably to their 2% target before raising interest rates.

Uploaded by

Wei Hong Teh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Yellen Is Watching These Four Indicators

for Signals on When to Raise Rates


Forget the Federal Open Market Committee's pledge to be "patient'' in raising rates
from near zero. Forget "considerable time'' and unemployment "thresholds.''
The new buzzword at the Federal Reserve is "reasonably confident.''
That's the phrase Chair Janet Yellen and her colleagues at the Fed used in the
statement this week to describe their need to feel pretty sure that inflation is on the
way back to their 2 percent target before liftoff.
In her press conference on March 18, Yellen laid out the markers for what
"reasonably confident'' means. While "I don't have a mechanical answer for you,''
there are four targets that matter.

1. Jobs, jobs, jobs


Labor markets need to continue to improve. "A stronger labor market with less labor
market slack is one factor that would tend to, certainly for me, increase my
confidence," Yellen said.
One key measure of slack is the unemployment rate, which was 5.5 percent in
February. The FOMC this month lowered its estimate of longer-term unemployment
to 5-5.2 percent. That is a kind of speed limit at which further declines would push
up inflation as the stronger hiring spurs faster wage gains. So the labor market has a
little further to run before officials expect to see wages rise.

2. Core inflation
Inflation without the food and energy components needs to stabilize. "We expect
inflation to remain quite low because of the depressing influence of energy price
declines and the dollar,'' Yellen went on. "We will be looking at the inflation data
carefully'' to discern what's happening beyond those short-term influences.
In other words, a stabilization or rise in core prices, excluding food and energy,
might have more weight than the actual headline price data.

3. Wage growth
Wages need to break out of their slump. "We will be looking at wage growth" as a
signal of inflation though "I wouldn't say either that that is a precondition to raising
rates."
There is plenty of anecdotal evidence from the likes of Target Corp. and Wal-Mart
Stores Inc., for example, that wages are edging higher. Yet there's not much support
in the data. Average hourly earnings rose just 2 percent over the past year through
February. That is in line with the average since the recession ended in June 2009.

4. Inflation expectations
What households and investors expect inflation to be in the future has to rise a bit.
"We'll be watching inflation expectations." For one thing, "market-based measures"
of expectations are too low. "If they were to move up over time, that would probably
serve to increase my confidence."
The measure that looks at inflation expectations five years from now fell as low as
1.75 percent in January. A move back to 2 percent would add to confidence.

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