“The labor market has yet to fully recover,” Yellen said today in a speech at the Kansas City Fed’s annual conference in Jackson Hole, Wyoming. While the five-year expansion has put more Americans back to work, “a key challenge is to assess just how far the economy now stands from attainment of its maximum employment goal.”

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Her comments echoed the message from minutes of the July Federal Open Market Committee meeting, which showed officials growing more aware that labor markets are returning to health. She said policy makers will have to look at a “wide range” of indicators to make that assessment, adding that there’s “no simple recipe” for deciding when to raise interest rates for the first time since 2006.

Yellen also emphasized the need for flexibility: If progress “continues to be more rapid than anticipated,” an interest-rate increase could come sooner than currently expected and further increases could be more rapid, she said. Conversely, if the Fed’s goals of full employment and stable prices remain elusive, policy would be more accommodative.

“It is a more balanced assessment than she has given in recent quarters,” said Michael Gapen, senior U.S. economist at Barclays Capital Inc. and a former member of the Fed Board staff. One takeaway: the closer the committee gets to full employment, the more difficult it is to “give concrete guidance” on the outlook for interest rates, Gapen said.

Communications Challenge

Yellen acknowledged that challenge, saying that officials are “particularly attentive to the need to clearly describe the policy framework we are using.”

Stocks remained lower after her remarks. The Standard & Poor’s 500 Index declined 0.2 percent to 1,988.4 at the 4 p.m. close of trading in New York after reaching an all-time high yesterday.

Five-year Treasury note yields rose on bets Yellen remains on pace to raise rates next year. Yields rose three basis points, or 0.03 percentage point, to 1.66 percent at 5 p.m. after earlier touching 1.68 percent, the highest since Aug. 5.

Policy makers in June projected that the benchmark interest rate would rise sometime next year. They have kept the rate close to zero since December 2008.

Measuring Slack

In her remarks, Yellen repeated the FOMC statement that “underutilization of labor resources still remains significant.” Much of her 16-page speech walked through measures of labor-market “slack” that Yellen uses — such as the number of people employed part-time who prefer full-time work — and how much of that slack might be related to weak demand as opposed to longer-term trends.

“Significant structural factors have affected the labor market, including the aging of the workforce and other demographic trends,” she said.

For some of the so-called structural changes, she presented a counter-argument on why they could also reflect cyclical trends. Disability applications may reflect “perceptions of poor job prospects,” she said. Bad job opportunities may have brought forward retirements, she said, and so the aging workforce may contribute less to declining labor participation in future years.

Yellen said wage movements have historically been sensitive to labor-market supply. Despite steady increases in payrolls, wage gains have been moderate, pointing to “weaker labor market conditions” than indicated by the 6.2 percent unemployment rate.

Wage Deflation

However, she added, “pent-up wage deflation” could also be holding down wage growth as firms find they don’t have to offer much higher pay to attract and keep qualified workers. That means “the current very moderate wage growth could be a misleading signal of the degree of remaining slack.”

Minutes of the July FOMC meeting released Aug. 20 showed some Fed officials “were increasingly uncomfortable” with the FOMC’s forward guidance that calls for keeping its benchmark interest rate low for a “considerable time.”

Because measuring slack is an inexact science, the debate on the committee is likely to intensify if labor markets continue to improve.

St. Louis Fed President James Bullard said in an interview in Jackson Hole that interest rates may have to rise earlier than policy makers had anticipated.

“The evidence is leading toward an earlier increase than would have been in the works earlier this year,” he said. “Labor markets have improved quite a bit relative to what the committee was thinking.”

Lockhart’s View

Atlanta Fed’s Dennis Lockhart, in a separate interview yesterday, warned of the risk of “moving prematurely and snuffing out some progress.” Lockhart will vote on policy next year and Bullard in 2016.

The median estimate of policy makers released after their June meeting shows they project the benchmark federal funds rate to rise to 1.13 percent at the end of 2015 and to 2.5 percent a year later.

FOMC participants will release their next set of quarterly projections on growth, employment, inflation and the rate outlook after the next meeting Sept. 16-17, which will also be followed by a Yellen press conference.

The decline in the unemployment rate has surprised Fed officials, who projected in December that it would fall to 6.3 percent to 6.6 percent by the end of this year.

Hourly Earnings

Other gauges Yellen watches continue to show weakness. The labor force participation rate, at 62.9 percent last month, is near the lowest since 1978. Average hourly earnings are 2 percent higher than a year ago, barely outpacing the 1.6 percent annual gain in the Fed’s main inflation gauge.

This year’s Jackson Hole conference is titled “Re- Evaluating Labor Market Dynamics.” Past gatherings foreshadowed some of the biggest policy shifts since the financial crisis. In 2010 and 2012, then-Chairman Ben S. Bernanke signaled new bond buying that has pumped up the Fed’s balance sheet to $4.41 trillion.

European Central Bank President Mario Draghi and Bank of Japan Governor Haruhiko Kuroda are among the speakers at the three-day symposium held by the Kansas City Fed.