From a Goldman Sachs Economics Research client note, Jan Hatzius says:

Yellen’s speech at Jackson Hole had three main themes:

  1. The pace of labor market improvement has clearly picked up in the last year
  2. While the assessment of the remaining amount of slack is now more “nuanced,” the decline in the unemployment rate probably overstates the degree of improvement and there is still a significant amount of slack
  3. It is essential to take a broad view of the state of the labor market instead of regarding any one indicator as “the truth.”

Goldman’s go on (bolding mine):

  • The faster-than-expected pace of decline in the unemployment rate is one reason why the more hawkish members of the FOMC would like to see the federal funds rate rise well before mid-2015. Most of them probably view the unemployment gap as the best available measure of labor market slack, and we suspect that many now expect the unemployment rate to continue falling rapidly.
  • Our own view is different. For one thing, we expect the decline in the unemployment rate to slow as labor force participation stabilizes or rises a bit. But our bigger disagreement is that we view the unemployment gap as a very incomplete measure of labor market slack, and prefer broader measures such as the U6 underemployment rate, or the “total employment gap” constructed by former Fed staffer Andrew Levin
  • We … put some weight on both measures … both show an even bigger pickup in the pace of improvement than the headline unemployment rate
  • Overall, we view a stable pace of improvement in U6 and the total employment gap as a reasonable assumption
  • What are the implications for Fed policy if we do stay on the recent path of improvement? We believe that a return to full employment sometime in 2016 would be broadly consistent with hikes beginning in the summer of 2015

Hatzius concludes;

  • If the hikes do start in the summer of 2015, and if the initial pace of hikes is quite gradual, this would likely leave the funds rate well below the FOMC’s estimate of its longer-term neutral level of 3¾% by the time the economy does in fact reach full employment.
  • Would such an outcome be consistent with the Fed’s mandate? In our view, the answer is yes, for three reasons.
  • First, the short-term neutral funds rate—a more appropriate yardstick for the stance of monetary policy than the longer-term neutral rate—is probably well below 3¾% at this point, and may still be somewhat below by the time full employment is reached.
  • Second, we believe the FOMC may still be putting some weight on optimal control. We have shown that the Fed staff’s preferred version of the Taylor rule—which includes a substantial degree of “inertia”—implicitly contains some optimal control considerations. Putting some weight on optimal control would imply a later return to a neutral funds rate.
  • Third, although the downside risks to the economic outlook have abated, the risks to the monetary policy outlook are still asymmetric, in our view. After all, monetary policymakers are confident that they have the tools to combat inflation, but are less sure that the same is true for deflation. This means that the risk of hiking too much and undershooting the inflation target still seems larger than thatof hiking too late and overshooting 2%.