Federal Reserve Chair Janet Yellen said she still expects to boost interest rates this year if the economy meets her forecasts, having a gradual pace of tightening to follow along with.
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While the labor market is nearing full strength, \”we are not there yet,\” she said Friday in a speech in Providence, Rhode Island.
\”If the economy continues to improve when i expect, I think it will be appropriate sooner or later this year to accept initial step to raise the federal funds rate,\” she said.
Even after the first rate increase since 2006, \”I anticipate that the pace of normalization is likely to be gradual,\” Yellen, 68, said.
Echoing the Fed\’s April statement, Yellen said she expects the economy to return to a \”moderate\” pace of growth after a disappointing first quarter as headwinds together with a cooling global economy gradually abate.
It\’s clearly likely to be one of the most dovish tightenings you\’ll ever see, when it comes
\”It\’s clearly likely to be one of the most dovish tightenings you\’ll ever see, when it comes, because the Fed wants to make clear they\’ll still be very accommodative,\” said Dana Saporta, U.S. economist at Credit Suisse Group AG in New York.
U.S. stocks erased losses following Yellen\’s remarks, using the Standard & Poor\’s 500 Index rising under 0.1 percent to 2,131.22 by 1:46 p.m. in New York. The yield around the benchmark 10-year Treasury note was up two basis points, or 0.20 percentage point, or 0.02 percentage point, to two.21 percent.
Yellen repeated that policy isn\’t on the pre-set course and also the Fed may tighten faster if the economy performs much better than expected or raise rates in a slower pace whether it disappoints. Delaying the first rate increase until employment and inflation go back to the Fed\’s objectives \”would risk overheating the economy,\” Yellen said.
Canada\’s inflation cools below Bank of Canada\’s comfort zone
She also repeated the Fed\’s two criteria for raising rates, which have been kept near zero since December 2008: \”I will have to see continued improvement in labor market conditions, and I will need to be reasonably certain that inflation will move back to 2 per cent over the medium term.\”
Policy makers expect growth to get after stalling in the first quarter, even as they fret concerning the strength from the consumer spending that produces two-thirds of the economy, minutes of their April meeting released Wednesday show.
Yellen said hello will be best to proceed \”cautiously,\” meaning taking \”several years\” before policy makers lift the government funds to its normal, longer-run level.
Even after significant employment gains, the labor market \”is approaching its full strength,\” though still short of it, Yellen said. As the U.S. is nearing what many economists have to say is full employment, the jobless rate \”probably doesn\’t fully capture the extent of slack within the labor market,\” she said.
Still, Yellen said the U.S. \”seems well positioned for continued growth\” as consumers benefit from cheaper gas prices that comes down to a \”sizable boost in household purchasing power\” estimated to be about US$700 per household on average.
Yellen listed three specific \”headwinds\” which are restraining growth. She said some of the effects are fading, while others are still present.
She said she expects the drag from low house prices and tight mortgage credit to \”continue to fade.\” With tax revenues alleviating financial constraints at state and local governments, that headwind \”is mostly behind us,\” she said. Finally, \”weak growth abroad\” has dented U.S. exports.
\”This headwind too should abate as development in the global economy firms, supported by monetary policies that generally remain highly accommodative,\” Yellen said.
While most policy makers forecast in March that they expected to raise rates of interest this year, the April minutes demonstrated that they \”thought it unlikely\” they would act at their next meeting on June 16-17.
Weak growth overseas, which has helped to push up the value of the dollar against the currencies of yankee trading partners, has \”dented U.S. exports and weighed on our economy,\” Yellen said Friday, adding that \”this headwind too should abate as development in the global economy firms.\”
Yellen noted that home values are recovering and said population growth is developing a need for more housing. Nevertheless, she said, credit remains tight for many would-be homeowners and \”activity in the housing sector will probably improve only gradually.\”
Consumer prices as measured by the Fed\’s preferred gauge rose 0.3 per cent in March from the year earlier and also have been underneath the Fed\’s goal since April 2012. Another measure of price pressures released on Friday showed that the cost of living excluding food and energy rose 1.8 percent in April from the year earlier.
The labor market continues to heal unevenly. Employers added 223,000 workers in April following a March slump which was worse than initially estimated. The jobless rate fell to five.4 per cent, the lowest since mid-2008, while underemployment remained elevated at 10.8 per cent, down from 10.9 percent.
Yellen, 68, spoke to the Greater Providence Chamber of Commerce. Senator Jack Reed, a Democrat from Rhode Island, helped facilitate her appearance prior to the group, based on his spokesman Chip Unruh, and Laurie White, the chamber president.
Reed has introduced a bill to want the head from the New York Fed be appointed through the U.S. president and confirmed by the Senate. Republican Senate Banking Committee Chairman Richard Shelby of Alabama has incorporated Reed\’s proposal in his own bill for any broader overhaul of financial regulation. Republicans on the panel approved the balance Thursday on a party-line vote.
Yellen\’s speech brings her back to the city where she discovered economics. The Brooklyn native finished Brown University having a degree in economics in 1967. She began with a philosophy concentration but switched to economics to study with professors Herschel Grossman and George Borts.
Borts and Grossman \”taught me that economics would be a subject where a systematic way of thinking about the world translated into policy prescriptions with real social impact,\” Yellen said, based on Brown\’s alumni magazine. \”I remember sitting in Herschel Grossman\’s class and thinking, \’Gee, I did not realize how much influence the Federal Reserve has on the health of the economy. If I ever have an opportunity at public service,\” she said, working at the Fed \”would be a worthwhile move to make.\’\”
This is Brown\’s commencement and reunion weekend, though Yellen\’s class of 1967 isn\’t holding a reunion this season, university spokesman Mark Nickel said.
–With assistance from Steve Matthews in Atlanta and Janelle Lawrence in Providence, Rhode Island.