WASHINGTON – Feb. 25, 2015 – Federal Reserve Chair Janet Yellen provided Congress with an upbeat view of the labor market Tuesday and said policymakers will raise interest rates when they are “reasonably confident” inflation will pick up toward the Fed’s annual 2 percent goal.
Her remarks set the stage for a possible mid-year rate increase while giving the Fed the flexibility to wait longer if the labor market falters and meager inflation shows no sign of ticking up.
In testimony before the Senate banking committee, she echoed the Fed’s last post-meeting statement, which said the Fed “can be patient” as it weighs a hike in interest rates. She reiterated that means rates won’t rise for at least the next two meetings, or until June, at the earliest.
But she cautioned that removal of the “patient” wording in an upcoming statement would not mean the Fed “will necessarily increase” rates within two meetings. Rather, she said it would indicate the economy has improved “to the point where it will soon be the case” that a change in interest rates “could be warranted at any meeting.”
The caveat is an attempt to prevent a sell-off in Treasuries and rising yields if the Fed drops the assurance in its March post-meeting statement, says economist Paul Ashworth of Capital Economics.
Yellen offered no clear signal on when the Fed will raise its benchmark rate from near zero for the first time since the 2008 financial crisis. But she indicated policymakers could act before unusually low inflation picks up.
“Provided that labor market conditions continue to improve,” the Fed will increase the federal fund rate when it’s “reasonably confident that inflation will move back over the medium term toward our 2 percent objective,” Yellen said in her semiannual report to Congress.
She said the labor market “has been improving along many dimensions,” her most positive assessment in recent memory. The unemployment rate, she noted, has fallen to 5.7 percent from 10 percent in 2009 and the ranks of long-term unemployed have “declined substantially.” She also said there are fewer part-time workers who prefer full-time jobs.
“There is reason, I think, to feel good about the economic outlook,” she said.
“Overall, the Fed is clearly getting close to the first rate hike, which we expect in June,” Ashworth wrote in a note to clients.
Yellen added that “room for further improvement remains,” noting the portion of Americans working or looking for jobs is low and wage growth is sluggish.
Sen. Charles Schumer, D-NY, urged the Fed not to raise rates “until wages are on a firm upward trend.”
But Yellen said the goal is restoring 2 percent inflation. “I don’t want to set down a single criterion. … We’ll be looking at a range of evidence that pertains to inflation.”
Some Republicans chided the Fed for keeping rates too low for too long. Sen. Patrick Toomey, R-Pa., said the financial crisis “is over,” but “crisis era rates” still prevail.
Separately, Yellen said she “strongly” opposes proposals in Congress to audit the Fed’s monetary policy deliberations. Such a move “would politicize monetary policy and bring short-term political pressure to bear on the Fed.”
Yellen is scheduled to testify Wednesday before the House Financial Services Committee.
Before the hearing, some economists said Yellen’s committee testimony could revive market expectations for a midyear interest rate hike after January meeting minutes suggested the move is likely to be deferred amid low inflation.
The minutes, released last week, said many Fed policymakers were inclined to wait longer to raise its benchmark rate and that a premature increase could set back the recovery. Treasury yields fell on the news and economists said an anticipated June rate increase was more likely to occur in September, or even later.
Despite the accelerating labor market, low oil prices and a strong dollar are keeping U.S. inflation well below the Fed’s annual 2 percent target. Raising rates too soon could dampen economic activity and further push down consumer prices, increasing the risk of deflation. Falling wages and prices can hobble the economy and even trigger recession.
But since the Jan. 27-28 meeting, the Labor Department has reported that employers added 257,000 jobs in January and 1 million the past three months, the best such stretch since 1997. Also, oil prices have edged up and Greece and its Eurozone partners last week reached at least a tentative deal on extending the beleaguered country’s bailout package.
Fed policymakers in opposing factions – those who typically favor pro-growth policies and those more concerned about controlling inflation – have pushed the likelihood of a mid-year rate increase in recent weeks.
Copyright 2015 USA TODAY, Paul Davidson; Alex Wong, Getty Images