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3 things to watch for in Janet Yellen's first monetary policy speech

Janet Yellen is delivering what will likely be her first major monetary policy talk as Fed chair around lunchtime today at the Economic Club of New York. As always, financial markets will be looking to these remarks for some signs of policy shifts to come. Here are three things to keep an eye on in particular:

1) The "slack" factor

There's a lot of disagreement among economists as to what to make of our 6.7 percent unemployment rate. Some say that in light of the low labor force participation rate, there's actually a lot more excess capacity in the economy than you would normally see with a 6.7 percent rate. In other words, there's a lot of "slack" in the labor market. Others say just the opposite — that many of the 6.7 percent are long-term unemployed people who are basically never going to work again. On that view, there's relatively little slack in the labor market.

If Yellen sees a lot of slack, that means low interest rates will last longer. If she sees little slack, that means rates will probably rise relatively soon.

2) Financial instability

The main thing restraining the Fed from providing additional monetary stimulus despite low inflation appears to be concern that stimulus creates problems for the stability of the financial system. That's a concern that's widespread in the Fed, but the single person most associated with those fears — Obama appointee to the Board of Governors Jeremy Stein — is stepping down from his post. Will a post-Stein, Yellen-helmed Fed stop worrying so much about this? If so, that's a dovish sign that could send markets up.

3) Overshooting

It's only since the onset of the Great Recession that the Fed has formally said it's targeting a 2 percent inflation rate. And yet we don't have an inflation rate that bounces up and down while averaging 2 percent. We've had an inflation rate that's generally in the 1-2 percent rage — normally on the higher side of that range, but never really poking above.

This raises the question of what will happen if the unemployment rate falls to, say, 6.3 percent and inflation pops up to 2 percent. The Fed could say "well, we've spent a lot of time below 2 percent so it's fine if inflation stays a bit above 2 for a while." Alternatively, the Fed could say "sorry still unemployed people — it's time to fight inflation." This is the question of overshooting. Is Yellen willing to embrace a certain amount of overshooting as the only way to achieve a 2 percent target over the long-term? Or is the target really a ceiling?

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