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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 eser!e is "reasonably confident.''

That's the phrase Chair anet #ellen 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 $ percent target before liftoff.

%n her press conference on March &( #ellen laid out the markers for what

"reasonably confident'' means. )hile "% don't ha!e a mechanical answer for you(''

there are four targets that matter.

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1. Jobs, jobs, jobs

*abor markets need to continue to impro!e. "+ stronger labor market with less labor

market slack is one factor that would tend to( certainly for me( increase my 

confidence(" #ellen said.

One key measure of slack is the unemployment rate( which was ,., percent in

February. The FOMC this month lowered its estimate of longer-term unemployment

to ,-,.$ percent. That is a kind of speed limit at which further declines would push

up inflation as the stronger hiring spurs faster wage gains. o the labor market has a

little further to run before officials e/pect to see wages rise.

2. Core inflation

%nflation without the food and energy components needs to stabilize. ")e e/pect

inflation to remain 0uite low because of the depressing influence of energy price

declines and the dollar('' #ellen went on. ")e will be looking at the inflation data

carefully'' to discern what's happening beyond those short-term influences.

%n other words( a stabilization or rise in core prices( e/cluding food and energy(

might ha!e more weight than the actual headline price data.

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3. Wage growth

 )ages need to break out of their slump. ")e will be looking at wage growth" as a

signal of inflation though "% wouldn't say either that that is a precondition to raising

rates."

There is plenty of anecdotal e!idence from the likes of Target Corp. and )al-Mart

tores %nc.( for e/ample( that wages are edging higher. #et there's not much support

in the data. +!erage hourly earnings rose 1ust $ percent o!er the past year through

February. That is in line with the a!erage since the recession ended in une $223.

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4. Inflation expectations

 )hat households and in!estors e/pect inflation to be in the future has to rise a bit.

")e'll be watching inflation e/pectations." For one thing( "market-based measures"

of e/pectations are too low. "%f they were to mo!e up o!er time( that would probably 

ser!e to increase my confidence."

The measure that looks at inflation e/pectations fi!e years from now fell as low as

&.4, percent in anuary. + mo!e back to $ percent would add to confidence.