For Federal Reserve Chair Janet Yellen, monetary policy now is all about a simple rule familiar to any subway rider: Mind the gap.

In her first major speech on her policy framework as Fed chair, Yellen said U.S. central bankers must be mindful of how short the Fed is of its goals of full employment and price stability.

“The larger the shortfall of employment or inflation from their respective objectives, and the slower the projected progress toward those objectives, the longer the current target range for the federal funds rate is likely to be maintained,” Yellen said today to the Economic Club of New York.

The gap, in both cases, is large, with a jobless rate of 6.7 percent more than a percentage point higher than the top end of the Federal Open Market Committee’s estimate of full employment. Inflation, by the Fed’s preferred measure, is more than a percentage point below its 2 percent goal. It will take more than two years for the economy to close in on the Fed’s goals, she said, adding that the Fed’s forecasts in the past were disrupted by negative surprises, not positive ones.

“She clarified exactly what her views are and what the committee’s views are about what the Fed may do over the next six to 12 months or even the next three years,” said Brian Jacobsen, who helps oversee $241 billion as chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin. Her speech “better managed the messages she wanted to get out of the last policy statement.”

David Fuller's view

Under this policy, I maintain that the US economy will show inflation pressures, at least in asset prices, before we see full employment.  Persistently low interest rates will not persuade firms to hire more people where smart machines can fill the requirement.

Cheap money continues to punish savers.  However, it cushions downside risk for most stock markets, although we will continue to see periodic sharp corrections where valuations are high, as we have seen this month.