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Fed's Rate Policy Hinges on 3 'Big Questions'
Federal Reserve officials will weigh three "big questions"--including low inflation and labor-market slack--as they consider when the economy is finally healthy enough for the central bank to begin raising rates, Fed Chairwoman Janet Yellen said.

In a speech at the Economic Club of New York on Wednesday, Ms. Yellen said a too-low inflation rate is a bigger worry than the Fed's easy-money policies sparking a surge in consumer prices. She also reiterated her arguments from a late-March speech that she sees quite a bit of slack left in the labor market in measures other than the official jobless rate, which stood at 6.7% in March.

The comments underscore Ms. Yellen's continued concern about the economy and labor markets despite some promising signs, and reinforce her message that the Fed plans to keep interest rates low for a long time to come.

In addition to inflation, Fed officials must monitor the amount of "slack" in the labor market and other unforeseen developments that could push the economy off its expected course, she said.

Ms. Yellen said that persistently low inflation is worrying because it can lead to deflation, a broad decline in consumer prices that can be difficult to reverse and lead to "prolonged periods of very weak economic performance." But even if outright deflation is avoided, a long period of very low inflation can be risky as well, she said, in part because it makes it harder for households and businesses to pay off debts, potentially weighing on economic growth.

Fed officials must also stay vigilant for the unexpected, Ms. Yellen stressed. "What factors may be pushing the recovery off track?" is the question they must keep asking themselves, she said, pointing to past moments since the end of the 2007-09 recession where the economy appeared to be turning a corner only to be derailed.

http://online.wsj.com/article/BT-CO-20140416-709288.html