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.