FEDERAL Reserve (the Fed) Chairman Janet L. Yellen said she expected the central bank to raise a key interest rate this year, “unless the economy surprises us.”
Speaking publicly for the first time since the Fed opted to hold the rate steady last week, Yellen said “considerable uncertainties” surround the US economic outlook.
Global financial markets have been tumultuous in recent weeks, after China devalued its currency last month, a sign its economy might be slowing.
She said there was a “risk that a slowdown in foreign growth might restrain US economic activity
somewhat further.” But Yellen emphasized she and other members of the policy-making Federal Open Market Committee (FOMC) didn’t expect that to derail the first rate hike in nearly a decade.
“The committee is monitoring developments abroad, but we do not currently anticipate that the effects of these recent developments on the US economy will prove to be large enough to have a significant effect on the path for policy,” Yellen said in a speech at the University of Massachusetts in Amherst.
The lengthy address looked the effects of inflation on monetary policy in the past, and how price expectations play into the Fed’s decision-making now as they consider lifting the federal funds rate from the near-zero level it has been since late 2008.
Strong job growth in recent years has pushed the US near full employment, with the unemployment rate down to 5.1 percent in August. But inflation has remained well below the Fed’s annual 2-percent target.
Yellen said sharply lower oil prices and the rising value of the dollar have kept inflation down recently. But Fed policy-makers were confident those were temporary factors and that “inflation will gradually return to 2 percent over the next two or three years.”
In economic forecasts released last week, Fed officials projected inflation would be 0.4 percent this year and not hit the central bank’s annual 2-percent target until 2018.
The Fed has a dual mandate to maximize employment and keep prices stable. Yellen said she and most Fed policy-makers “currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter.”
“But if the economy surprises us, our judgments about appropriate monetary policy will change,” Yellen said. Some analysts have said the Fed should wait to raise rates until the economy is at full employment and inflation is back to 2 percent.
Acknowledging the argument, Yellen said that would risk harming the economy because there is a lag in the effects of monetary-policy changes.
“If the FOMC were to delay the start of the policy-normalization process for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals,” she said. “Such an abrupt tightening would risk disrupting financial markets and, perhaps, even inadvertently push the economy into recession.”
After their meeting last week, Yellen said she and her colleagues wanted “a little bit more time to evaluate the likely impacts on the United States” of the recent financial-market turmoil, which could be a signal of a global economic slowdown.
Fed officials could act as soon as their next meeting in late October. But Fed policy-makers might have trouble determining the effects on the US if a budget dispute leads to a federal government shutdown. The fiscal year ends on September 30 and if Congress and the White House can’t agree on at least a short-term spending bill, the next batch of data—including the September jobs report due to be released on October 2—could be delayed until the government reopens.
A 16-day partial government shutdown in October 2013 caused the labor department to delay releasing the September jobs report for two weeks. The next meeting of the policy-making FOMC is on October 27 and 28, and Fed officials probably would need updated data on jobs and other economic indicators to decide on an interest-rate hike.
Obama administration officials hope there will not be a shutdown. But as a precaution, they are reviewing contingency plans, Labor Department Spokesman Stephen Barr said on Thursday.
MCT
Image credits: AP/Jacquelyn Martin