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Economists are reading Janet Yellen's tea leaves on monetary policy

Key Points
  • In her remarks at a conference in Jackson Hole, Wyoming, on Friday, Yellen cautioned against risk-taking in financial markets.
  • Yellen and President Trump disagree on some regulations, Ethan Harris said.
  • Wall Street wants White House economic advisor Gary Cohn to be the next Fed chair.
Paul Christopher: Markets watching gradual pace to rate hikes

Federal Reserve Chair Janet Yellen has been scrupulously avoiding discussion of specific details on the future of monetary policy, leaving economists to draw inferences from her sentiments about the health of the overall economy.

"If you hear Janet Yellen say something like, 'Well, gee, we really don't think that lending has grown excessively,' that's a good sign for the markets," said Paul Christopher, head global market strategist for Wells Fargo.

Christopher said that such a seemingly banal statement would imply that "liquidity is not considered excessive, therefore rate hikes will not be aggressive, and therefore the market can return to the focus and the consensus — strong consensus — that there's going to be a very gradual pace to rate hikes."

He also said the hikes could slow to such a pace that the next intervention won't take place until 2018. "So that's going to be a reason for the market to rise here," he said.

In her remarks at a conference in Jackson Hole, Wyoming, on Friday, Yellen cautioned against risk-taking in financial markets.

"Any adjustments to the regulatory framework should be modest and preserve the increase in resilience at large dealers and banks associated with the reforms put in place in recent years," she said.

Federal Reserve Board Chair Janet Yellen
Getty Images

Yellen's longevity as the Fed chair has come under intense scrutiny from economists. While President Donald Trump may approve of Yellen's "dovish" approach to monetary policy, "in the regulatory front, obviously there's some disagreement there," said Ethan Harris, head of North America economics at Bank of America Merrill Lynch.

"Like most economists," Harris said, "I think that Yellen probably will not be reappointed."

White House economic advisor Gary Cohn is Wall Street's darling to replace Yellen, though his position in the Trump administration became tenuous in recent weeks.

Cohn drafted a resignation letter after the president's response to violent protests in Charlottesville, Virginia, the Financial Times reported, and had an acrimonious relationship with former advisor Steve Bannon, who left the administration last week.

— CNBC's Jeff Cox contributed to this report.

WATCH: Yellen says making progress toward price stability

Yellen: Making progress toward price stability