Tags: Yellen | rates | Fed | economy

Yellen Sees Gradual Pace of Rate Increases Starting This Year

Friday, 27 March 2015 04:06 PM EDT

Chair Janet Yellen said she expects the Federal Reserve to raise interest rates this year, and that subsequent increases will be gradual without following a predictable path.

“I expect that conditions may warrant an increase in the federal funds rate target sometime this year,” Yellen said Friday in remarks prepared for delivery in San Francisco. She and fellow policy makers “generally anticipate that a rather gradual rise in the federal funds rate will be appropriate over the next few years.”

After the initial increase, officials won’t follow “any predetermined course of tightening” that involves similar-sized increases at regular intervals, Yellen said.

“The actual path of policy will evolve as economic conditions evolve, and policy tightening could speed up, slow down, pause, or even reverse course depending on actual and expected developments in real activity and inflation,” she said.

Policy makers last week opened the door to an interest-rate increase as soon as June, while also signaling they’ll go slow once they get started. The benchmark federal funds rate has been kept near zero since December 2008.

Rates near zero helped cause a “sizable reduction” in labor market slack, and a modest rate increase is “highly unlikely” to halt that progress, Yellen said.

She said the gradual path of tightening is reflected in a new set of projections by Fed officials released on March 18. Officials cut their median estimate for the main rate at the end of 2015 to 0.625 percent, down from 1.125 percent projected in December.

No April Move

Officials have ruled out a move at the next meeting in April. The next scheduled session after that will be in June.

The labor market is “likely to improve further in coming months,” Yellen said. At the same time, progress on meeting the Fed’s inflation goal has been “notably absent.” Some of the weakness in inflation “likely reflects continuing slack” in labor markets.

Despite disappointing retail-sales data, she said consumer spending probably will “expand at a good clip this year given such robust fundamentals as strong employment gains, boosts to real incomes from lower energy prices, continued increases in household wealth, and a relatively high level of consumer confidence.”

She was less encouraged by other parts of the economy. “Dollar appreciation appears to be restraining net exports, low oil prices are prompting a cutback in drilling activity, and the recovery in residential construction remains subdued,” the Fed chief said.

Pledge Dropped

The policy-setting FOMC dropped a pledge last week to remain “patient” in raising rates, instead saying they would wait until being “reasonably confident” inflation will move back to its 2 percent target.

Low inflation, stuck below the Fed’s goal for almost three years, is one of the main reasons to wait before raising the policy rate. The Fed’s preferred gauge of price pressures increased 0.2 percent in January from a year earlier.

Little price pressure is coming from wage gains, which remain slow despite the stronger labor market. Average hourly earnings rose 2 percent in February from a year ago, matching the average since the end of the recession in June 2009.

Cheaper oil also has cut inflation. Crude futures plunged from $107 in June to a six-year low of $42.03 last week.

Fed officials are seeing more signs the world’s largest economy is strong enough to handle higher borrowing costs.

Surging Payrolls

Payrolls have been surging, pushing the unemployment rate to 5.5 percent in February, the lowest in almost seven years. U.S. firmed added 295,000 jobs last month, the 12th straight month payrolls have increased by at least 200,000, the best run since a 19-month stretch that ended in March 1995.

The March employment report, due on April 3, is forecast to show 250,000 new jobs were created, according to the median estimate in a Bloomberg survey of economists.

Fed Vice Chairman Stanley Fischer said on Monday the U.S. had received “two very positive numbers for the first quarter of 2015 and we’re waiting for another one.” He also said in remarks in New York that raising rates from near zero “likely will be warranted before the end of the year” and subsequent increases probably won’t be uniform or predictable.

San Francisco’s John Williams, who also votes this year, said in a speech this week mid-year will be time to “have a discussion” about raising rates, altering the phrase from “serious discussion” that he used in a March 5 address.

Yellen, 68, spoke at a San Francisco Fed conference on “The New Normal for Monetary Policy,” returning to the reserve bank she led from 2004 to 2010. She became Fed vice chair in 2010 and was sworn in as chair in February 2014.

© Copyright 2024 Bloomberg News. All rights reserved.

Federal Reserve Chair Janet Yellen said she expects to raise interest rates this year, and that subsequent increases will be gradual without following a predictable path.
Yellen, rates, Fed, economy
Friday, 27 March 2015 04:06 PM
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