In a Nutshell: “… if progress in the labor market continues to be more rapid than anticipated by the Committee, then increases in the federal funds rate target could come sooner than the Committee currently expects … Of course, if economic performance turns out to be disappointing … then the future path of interest rates likely would be more accommodative than we currently anticipate.”

If you don’t like two armed economists, you will truly dislike the talk that Fed Chair Janet Yellen gave today at the Federal Reserve Bank of Kansas City’s Economic Symposium in Jackson Hole, Wyoming.

The greatly anticipated speech delved into the details of the labor markets, the impact of wages on inflation and the way that monetary policy should react.  Of course, being a good economist and academic, Chair Yellen discussed all sides of the issues.  For example, is the decline in the participation a result of changing structural factors such as the aging workforce or is a cyclical decline due to frustration that will unwind once the labor market firms more?  The answer is, of course, yes.  That is, it could be one, or the other or even both, which it likely is.

Similarly, there were discussions about wage pressures, how long it could take for wages to rise faster and when rising labor costs would actually translate into rising inflation.  As any economist will tell, the answer is hardly clear since there are multiple competing factors.  Thus, wage pressures could ignite quickly or be delayed.  Rising wages could signal future increases in inflation, or maybe not.  The Fed should react quickly to rising wages or maybe wait if the wage increases are temporary.  In other words, the answer is any or all of the above.

So, given the talk, is there anything to take away from the speech?  Yes.  First, the Fed members recognize that we are a lot closer to their desired goals than they had projected.  Second, the lack of wage inflation is not necessarily a good sign for future inflation.  The apparent current slack in the labor market could disappear more quickly than expected.  In the past, the Fed Chair had generally been on the side that current labor market conditions argue for keeping rates low for an extended period.  Now, those same conditions need to be watched more carefully.

If Janet Yellen was viewed believing the labor market had plenty of slack and wage pressures would not build anytime soon, that perception has to change.  She recognizes that the risks are more balanced.  That means she will be more willing to move rapidly if the economy continues to improve surprisingly quickly.  Thus, investors should not assume any time frame for Fed rate hikes.  It is easy for economists and market analysts outside the Fed to pick a date.  But today’s talk makes it clear that if the Fed has to move sooner or deems it necessary to wait longer, the Fed Chair is totally prepared to go in that direction, whatever it may be.