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Yellen to put Federal Reserve's new leadership on display

WASHINGTON--The Janet Yellen era at the Federal Reserve begins in earnest this week with a two-day meeting, a policy statement and fresh economic forecasts. Yet all that will be a prelude to the marquee event: Yellen's first news conference as Fed chair.

The financial world will be parsing every word for any hint of a policy shift.

Will Yellen, having succeeded Ben Bernanke, embrace Bernanke's approach of keeping rates low while gradually paring the Fed's economic stimulus?

Or, as some speculate, might she prove even more inclined than Bernanke to favor low rates to try to accelerate job growth, even at the risk of high inflation?

No major announcements are expected when the meeting ends Wednesday. But many analysts think the Fed could make one change in its statement: They think it may drop any reference to an unemployment rate that might cause the Fed eventually to raise short-term rates. Eliminating that reference would help the Fed maximize its flexibility on rates.

The Fed's most recent policy statement said it planned to keep short-term rates at record lows “well past” the time the unemployment rate falls below 6.5 percent. The rate is now 6.7 percent. But several Fed officials have recently suggested scrapping the 6.5 percent threshold and instead describing more general changes in the job market and inflation that might trigger a rate increase.

Charles Evans, president of the Federal Reserve Bank of Chicago, said last week that there's “not a large expectation” that the 6.5 percent threshold will remain much longer, a point also made recently by William Dudley, president of the New York Fed.

One reason for dropping the threshold, as Yellen among others have noted, is that the unemployment rate can overstate the job market's health. In recent months, for example, the rate has fallen not so much because of robust hiring but because many people without a job have stopped looking for one. Once people stop looking for a job, they're no longer counted as unemployed, and the rate can fall as a result.

“There is a growing consensus to go with more nuance instead of a specific number,” said Diane Swonk, chief economist at Mesirow Financial. “I think they are just too close to 6.5 percent on the unemployment rate.”

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