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Yellen Poised to Push Back at Inflation Hawks at Jackson Hole

NEW YORK (TheStreet) -- As of Thursday, the prevailing view among the top U.S. policymakers is the U.S. economy is not quite ready yet for the beginning of interest rate hikes. It's better to be safe and conservative than sorry.

Minutes released from the Federal Reserve's July 29-30 meeting were widely perceived by investors to be more hawkish than before, amplified in no small part by the increasing transparency of the inner workings of the world's most powerful central bank. However, a closer inspection of the text indicates that in many respects, the "doves" are still very much in control of the dialog and Fed Chair Janet Yellen still very much has the majority of the voting members on her side. Changes in the voting composition of the Federal Open Market Committee in 2015 are expected to result in a group even more focused on labor market slack.

Read More: Housing Is Heating Up: Does This Change Fed's Thinking?

All these dynamics are expected to be aptly reflected in Yellen's speech at 10 a.m. EDT Friday at the yearly symposium of global monetary policymakers in Jackson Hole, Wyo.

While the minutes of the Fed underscored the debate over policy normalization, in other ways the minutes appear no more hawkish than they had been for the past several meetings. They reiterated that the Fed as a whole continues to be very much data dependent.

The upshot is the same as its been in prior meetings: If the economy picks up momentum and continues to move toward the central bank's objectives, then the Fed will likely raise rates sooner. And on the other hand, if the Fed continues to see a wide gap between where the labor market currently stands and the need for the labor market to ramp up its use of resources, then the Fed will remain with its accommodative stance for longer than expected.

However the minutes also showed a strong pushback at the hawks, particularly Philadelphia Fed President Charles Plosser, St. Louis Fed President James Bullard and Dallas Fed President Richard Fisher, with the statement about the "significant underutilization of labor resources" being a key point of discussion.

"Certainly the hawks of the market are going to point out the more hawkish comments and put more credence on the hawkish officials' comments -- so that's Plosser, that's Bullard, that's Fisher," said Lindsey Piegza, the chief economist with Sterne Agee. "On the other hand we have to remember that it's the chair -- Chair Yellen whose focus is on the labor market. The statement was added in to say 'look, the headline data is improving, but guys, we need to take this in context'."

While Ben Bernanke had used Jackson Hole as a place to announce policy initiatives or changes to monetary policy, Piegza expects Yellen will use the opportunity and really every public forum opportunity to continue to justify the Fed's continued accommodative stance. Jackson Hole will give her just another occasion to reinforce why the Fed cannot raise rates in the face of a still very stagnant and fragile labor market.

"I think she's been pretty clear that inflation, while they are keeping an eye on it, is taking a back seat right now to labor market conditions," said Piegza. The economist expects Yellen will comment on Friday on the recent moderation in headline inflation pressures, as seen in the consumer price index this week and the producer price index last week -- both of which reversed away from the Fed's 2% target. "I think she will tie the inflation conversation back to the lack of wage pressure . . . that wage-price spiral -- we just haven't seen that cyclical come to fruition yet."

With the changing composition of the FOMC voting committee more likely to lean even more heavily toward the employment focus in 2015, Kristina Hooper, U.S. Investment Strategist at Allianz Global Investors says the accommodative thinking is likely to prevail.

"I don't think the FOMC has made up its mind at all about when it will raise rates. It really is looking at this mosaic of data -- and again this [the 2014 membership] is not necessarily the membership that's going to decide anyway," she said.

While dove Narayana Kocherlakota, president of the Minneapolis Federal Reserve Bank, is expected to be rotating out of the FOMC in 2015, dovish figures Charles Evans and John Williams are anticipated to be coming in. In the hawkish camp, Fed Vice Chairman Stanley Fischer is expected to remain, but Richard Fisher is on his way to be rotated out. Outgoing hawk Plosser and centrist Loretta Mester, president of the Cleveland Federal Reserve, would be replaced by Dennis Lockhart, the Atlanta Fed president and a dove.

Read More: 'Fast Money' Recap: Forget the Fed, What About Apple?

-- By Andrea Tse in New York

Follow @AndreaTTse

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