The Philippine Star

US Fed to keep rate hikes slow – Yellen

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The Federal Reserve will stick to a gradual path of interest rate rises even if inflation runs above its two percent target, chair Janet Yellen said on Wednesday, signaling that the US central bank is willing to use low rates to push down even harder on unemployme­nt.

Yellen's comments were the one major surprise in the Fed's decision on Wednesday to hike rates by 25 basis points and likely lift them two more times this year even as the labor market improves and inflation firms.

The comments also signaled that the central bank was confident it could rein in inflation, if needed, and that it has the credibilit­y to do so in the event of a sustained spike.

"It’s a reminder two percent is not a ceiling on inflation, it’s a target," Yellen told a news conference after the rate decision was released. “There will be some times when inflation is above two percent, just like it's been below two percent.”

Inflation has ticked up globally after years of negative and near-negative rates and massive injections of central bank money into the financial system in a bid to head off deflationa­ry forces.

US headline inflation is about two percent already, and core inflation - seen as a better measure of underlying inflation trends because it strips out volatile food and fuel prices – is expected to reach two percent next year.

“They want to make sure they don’t short-circuit the recovery,” said Brent Schutte, chief investment strategist at Northweste­rn Mutual Wealth Management Company. "They are buying themselves some leeway in the future to let inflation tick higher and still not raise rates faster."

Yellen's term as Fed chair has been marked by a cautious approach to raising interest rates, and her comments on Wednesday and in the Fed's policy statement suggest that the central bank is keen to avert a tightening of financial markets if data in coming months shows inflation above the bank's target.

Four years ago, then- Fed chair Ben Bernanke triggered a bond selloff when he hinted at curtailing the central bank’s bond-buying stimulus sooner than markets had expected. The “taper tantrum” ended up delaying the Fed's planned return to a more normal stance of monetary policy.

Yellen did not specify how much of an inflation overshoot the Fed would tolerate, though past policymake­r comments suggest that 2.25 percent or 2.5 percent inflation would be acceptable to the central bank.

“If we had a little inflation, would that be so terrible?" said Alice Rivlin, a former Fed vice chair now at the Brookings Institutio­n. "It's something the Fed knows very well how to handle."

 ??  ?? Federal Reserve Board chairman Janet Yellen speaks during a briefing in Washington, DC. AFP
Federal Reserve Board chairman Janet Yellen speaks during a briefing in Washington, DC. AFP

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