Yellen hints that benchmark rate to remain near record low for now
WASHINGTON — Despite recent sizable job gains, Federal Reserve Chair Janet Yellen is signaling that her agency is in no rush to withdraw the support it is providing the economy.
Extra caution is warranted, she said on Tuesday, given a number of “false dawns” in this recovery when a hoped-for acceleration in growth has failed to materialize.
“Although the economy continues to improve, the recovery is not yet complete,” she told the Senate Banking Committee, delivering the Fed's semiannual economic report to Congress.
Analysts said that Yellen's remarks indicated that the central bank plans to keep its benchmark short-term interest rate near a record low of zero, where it has been since December 2008, for some time to come.
While many economists believe the Fed will delay its first rate increase until next summer, some had wondered whether a recent string of better-than-expected unemployment numbers might cause that date to be moved up.
Yellen acknowledged the improvement in the labor market, where the unemployment rate fell to 6.1 percent in June. But she said this rate was still above the 5.2 percent to 5.5 percent that Fed officials view as optimal. She said there were still far too many long-term unemployed Americans, and wage growth remained weak, all indications of “significant slack” remaining in the job market.
On inflation, Yellen noted that prices by the Fed's favored price gauge were up 1.8 percent in the 12 months ending in May, and she noted that this was below the Fed's 2 percent target.
“Yellen's message was that we have made progress on the economy, but we still have a ways to go,” said Stuart Hoffman, chief economist at PNC Financial. He predicted the first rate hike will not occur until October 2015.
Yellen's comments on Tuesday, which hewed closely to the remarks she made at a news conference after the Fed's June meeting, had little impact on financial markets, although stocks of some Internet and biotech companies were jolted by a reference in the agency's Monetary Policy Report that stock valuations of “social media and biotechnology firms appear to be stretched.”
While the reference brought back memories of former Fed Chairman Alan Greenspan's famous comment in a December 2006 speech about possible “irrational exuberance” in the stock market, analysts noted that Yellen in her testimony played down worries about asset bubbles.
She told Congress that while prices of real estate, stocks and corporate bonds had risen, those prices remained generally in line with historic norms. She repeated her view that government regulators had better ways to control asset bubbles than using such a blunt-force instrument as hiking interest rates.
Yellen repeated the language in the Fed's last several policy statements that the central bank expected to keep short-term rates near zero for a “considerable period” after it ends its monthly bond purchases, which have been designed to keep long-term rates low.
Pressed to be more specific, Yellen cited the individual forecasts released at the last meeting that showed 12 members of the Fed's 19-member policy panel expect the first rate hike to occur in 2015 with later increases likely to be gradual. Many were expecting a federal funds rate of 1 percent or less at the end of next year.
In answering questions, Yellen said that while the recent drop in the unemployment rate is encouraging, she noted past periods in the subpar recovery where hopes about stronger growth fizzled. She said that with its key short-term rate near zero, the Fed has no margin for error.
“The Federal Reserve does need to be quite cautious with respect to monetary policy. We have in the past seen sort of false dawns, periods in which we thought our growth would speed, pick up and the labor market would improve more quickly, and later events have proven those hopes to be unfortunately over-optimistic,” she told the committee. “We need to be careful to make sure that the economy is on a solid trajectory before we consider raising rates.”
Yellen confirmed a date revealed last week in the minutes of the June meeting that the Fed's bond purchases, which have been aimed at keeping long-term rates low, will likely be halted at the October meeting. They are at $35 billion per month, down from $85 billion last year.
The Fed chair said there is an active debate on the Fed's approach to unwinding the bond program, with more details expected to be released before the end of the year. Financial markets are closely watching that process given that the Fed's decision on how it sells off its assets could have a significant impact on interest rates.
Yellen stressed that the Fed's future actions will depend on how well the economy performs. She said that if labor market conditions continue to improve more quickly than anticipated, the Fed could raise its key short-term interest rate sooner than projected. But she said weaker conditions would mean a longer period of low rates.
She is scheduled to testify on Wednesday before the House Financial Services Committee.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- First Niagara to cut 200 jobs; Pittsburgh impact unclear
- Pennsylvania jobless rate drops to 5.1 percent
- Beacons track shoppers’ smartphones amid retailers’ aisles
- 8 Western Pennsylvania hospitals penalized over infections
- Nonprofit hospitals in Western Pa. feel pain in finances despite Affordable Care Act
- Redundant backup systems are keeping nuclear plants safe
- Hospital finances still crying ‘ouch’
- Stock market makes biggest gain in 3 years
- Ford expands air bag recall across U.S.
- Online price battle heats up with intraday price fluctuations
- FedEx to buy product-return firm Genco in e-commerce push