Here’s an initial report from Reuters on San Francisco Fed president Yellen’s remarks today. I read this as expressing more concern over the potential for inflation than the potential for economic slack. I will update this as more reports become available, particularly if they indicate a different stance than implied here:
Fed's Yellen says US economy doing reasonably well, Reuters: The best thing the Federal Reserve can do in the wake of Hurricane Katrina is to ensure the stability of the national economy, San Francisco Fed President Janet Yellen said on Thursday. After 10 consecutive increases in benchmark interest rates, even before Katrina "the conduct of monetary policy had reached a challenging phase," Yellen said ...
"The greatest contribution monetary policy can make is to keep the national economy on an even keel," ... "Monetary policy, unfortunately, has little scope to cushion the immediate economic fallout from such a severe and sudden blow to a region." Core inflation seems "relatively well contained" for now, but faces risks to the upside from both energy prices and the labor market, she said. The U.S. jobless rate dropped to 4.9 percent in August, and other measures such as the employment-population ratio have improved recently. "While a 'whisker' of slack may still remain, we probably can't count on slack to hold inflation down," Yellen said. Meanwhile, central bankers are trying to navigate the twin tides of higher oil prices -- the potential for negative impacts on spending and higher inflation, Yellen said. "Higher oil prices may be partly passed through to core inflation at least for a time," she said.
[Update: MarketWatch report - There is more of an emphsasis on how policy depends upon incoming data. Rueters says Treasuries fall after speech. Full text of speech. William Polley comments that overall the speech seems less hawkish than Moskow's comments yesterday.]
[Update: This statement from the speech is worth highlighting because some of the discussion surrounding monetary policy has forgotten about the long lags that exist between the implementation of policy and its subsequent effects (see here for estimates of the lags involved). I understand the call for the pause was in as much for the psychological impact as for the actual direct short-run economic effects. But to the extent that the psychological impact relies upon a misunderstanding of the lags involved, I don’t think the Fed will be swayed by this argument. Instead, they will explain the limitations:
Monetary policy, unfortunately, has little scope to cushion the immediate economic fallout from such a severe and sudden blow to a region, because monetary actions can't be directed at a particular area of the country, and their effects take time to be felt. It is fiscal policy—government spending and transfers—that is necessary to address the immediate needs of the affected areas.