Published On: Thu, Feb 26th, 2015

Janet Yellen: Fed Still ‘Patient’ on Raising Rates

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WASHINGTON — Federal Reserve Chair Janet Yellen said Tuesday that the U.S. economy is making steady progress, but the Fed remains patient in raising interest rates because too many Americans are still unemployed, wage growth remains sluggish and inflation is too low.

In her semiannual economic report to Congress, Yellen sought to explain how the Fed would begin raising rates from lows near zero. Its continuing use of the word “patient” means a rate hike is unlikely for at least the next two meetings, she said.

When the Fed eventually changes its language, Yellen said that won’t necessarily translate to an imminent shift in monetary policy. Rather, it will indicate that the Fed can start considering rate hikes on a “meeting-by-meeting basis.”

Her remarks come at a delicate time for the Fed. After winning praise for how she handled her first year as head of the central bank, Yellen is facing a tougher challenge this year. She must navigate a transition from record-low interest ratesto a period when the Fed will start raising rates while trying to keep financial markets calm and maintain economic growth.

Gaining Momentum

Yellen’s testimony supports analysts’ view that a rate hike isn’t likely before June or even later this year.

As expected, Yellen stuck closely to the views revealed by the minutes of the Fed’s Jan. 27-28 meeting, in which Fed officials recognized that the economy was finally gaining momentum nearly six years after the country began to emerge from the worst recession since the 1930s.

But many Republicans have complained that the Fed’s cautious approach on raising rates was increasing the risks that inflation could accelerate to worrisome levels in the future, forcing the Fed to push rates up more quickly.

What the [Fed] is thinking and how they are analyzing this very difficult problem set remains a mystery.

Senate Banking Committee Chairman Richard Shelby, R-Alabama, said in his opening remarks that too much delay in raising rates “could lead to a more painful correction down the road.”

Shelby was also critical of secrecy at the Fed. He said that the minutes of Fed discussions, released three weeks after each meeting, offer too little guidance about how the Fed plans to unwind its unprecedented level of support to the economy.

“What the [Fed] is thinking and how they are analyzing this very difficult problem set remains a mystery,” Shelby told Yellen. “I would argue … that there is an even greater need now for additional oversight by Congress and further reforms” of the Fed.

Conservative Republicans in both the House and Senate have been pushing for legislation that would expand the ability of Congress to oversee Fed actions, including expanded audits of the institution. Yellen and other Fed officials have opposed this effort, saying it could compromise the independence the Fed needs to conduct interest rate policies.

In her testimony, Yellen said that since she delivered the Fed’s last report to Congress in July, the employment situation has shown improvement “along many dimensions.” She noted that the unemployment rate is down to 5.7 percent from a high of 10 percent in late 2009, and job growth has accelerated to an average of 280,000 new jobs created each month.

Labor Market Concerns

She said that long-term unemployment has declined substantially and fewer workers are reporting that they can only find part-time work. But balanced against those improvements, Yellen said that “too many Americans remain unemployed or underemployed, wage growth is still sluggish and inflation remains well below our longer-run objective.”

One of the Fed’s primary goals is stable prices, which it defines as inflation rising at 2 percent annually. But for more than two years, inflation has been rising well below 2 percent and has fallen farther from that target in recent months.

Yellen attributed that development to the big plunge in oil prices and a rising value of the U.S. dollar, which has strengthened as the U.S. economy has outperformed other countries. A stronger dollar holds down inflation by making imports cheaper for Americans.

Yellen noted that foreign economic developments posed risks to the U.S. outlook, although she said the pace of growth overseas had improved slightly in the last half of last year.

She said the foreign challenges included the threat that the Chinese economy, the world’s second largest, could slow more than anticipated. She also mentioned on-going threats in Europe including a slow recovery and very low inflation. But she said aggressive efforts by the European Central Bank to boost growth should boost growth in the euro area.

Yellen will follow her appearance Tuesday before the Senate Banking Committee with testimony Wednesday before the House Financial Services Committee.

[source : dailyfinance.com]