Yellen says Federal Reserve is on course
Interest rates may slowly rise
A first-quarter economic chill won’t deter the U.S. Federal Reserve from its plan to raise interest rates this year, chair Janet Yellen said, assuring investors that the pace of subsequent tightening will be gradual.
Although the labour market is nearing full strength, “we are not there yet,” she said Friday in a speech in Providence, R.I., emphasizing the Fed will proceed “cautiously.”
If the economy continues to improve as she expects, “it will be appropriate at some point this year” to start raising rates, Yellen, 68, said in her first public comments on the policy outlook since late March. Yellen’s comments show a determination to act this year, while avoiding a shock to the stillfragile economy by stressing that the cost of everything from car loans to mortgages will stay low for years. The Fed has kept rates near zero since December 2008.
“It’s clearly going to be one of the most dovish tightenings you’ll ever see,” said Dana Saporta, U.S. economist at Credit Suisse Group AG in New York. U.S. stocks closed lower, with the Standard & Poor’s 500 Index down 0.2 per cent to 2,126.23 at 4 p.m. in New York, after closing Thursday at a record. The yield on the benchmark 10-year Treasury note was up two basis points, or 0.02 percentage point, to 2.21 per cent.
Fed officials want to avoid surprising investors, as they did in mid-2013 when bond yields soared, minutes of the April 28-29 Federal Open Market Committee meeting released on Wednesday show.
Yellen said the best way for the Fed to achieve its policy goals would be “by proceeding cautiously, which I expect would mean that it will be several years before the federal funds rate would be back to its normal, longer-run level.”
She repeated the Fed’s two criteria for raising rates, which have been kept near zero since December 2008: “I will need to see continued improvement in labour market conditions, and I will need to be reasonably confident that inflation will move back to two per cent over the medium term.”