The US economic outlook remains 'highly uncertain'

External risks to the US outlook have risen since mid-June, leading her to emphasize that "the course of the economy and inflation remains highly uncertain." Federal Reserve Chair Janet Yellen's own assessment of the outlook warrants the beginning of policy normalization later this year, but her assessment of the balance of risks means it wouldn't take too much to push the chair off of this view.

In a speech before The City Club of Cleveland, she sounded less dovish than she did during the press conference following the June FOMC meeting and, on balance, the minutes to the June meeting. The modest shift in tone was in line with our expectation heading into the speech, given the improved data flow since the committee met on June 16-17.

Her uncertainty about the degree of economic momentum is important for the policy outlook given her view that the unemployment rate continues to understate the degree of labor market. As a result, she needs to be certain that economic momentum will be sufficient to support further progress in labor markets since she sees full employment as further away than many on the committee. 

Her assessment that labor market slack remains elevated and allowance for factors that may prove more persistent in holding down the pace of economic growth mean that  incoming data on activity and labor markets need to be quite strong to keep her baseline policy outlook in place, particularly if global financial markets remain volatile to developments in Greece and China. Incoming data will be sufficiently strong and spillovers from external risks sufficiently small to warrant rate hikes beginning in September, says Barclays.

Most of the decline in participation is related to long-run demographic factors and, as a result, the participation rate is unlikely to halt the ongoing decline in the unemployment rate.In her view, the two factors that have pushed inflation lower in recent months the fall in oil and rise in the trade-weighted value of the dollar - are either behind us or likely to abate shortly.